NOTICE: All contents © 2001, George A. Ure, except other authors as noted. This document is intended for the sole use of subscribers and may not be transmitted, reproduced, or in other way used without the prior express consent of the author. This publication is by subscription: $30/year for web browser accessed delivery to a password protected site (price effective until January 1, 2002), and $100/year if delivered by U.S. mail within the U.S. and Canada. Overseas subscriptions are US$ 250/year which includes postage. To subscribe, send a check to: George A. Ure, 2726 Shelter Island Drive, #322, San Diego, CA 92106. Your username and password are both your email address, in all lower case to access the protected web site, so don't forget to include it! Address comments and correspondence to: firstname.lastname@example.org. Read the disclaimer: http://www.urbansurvival.com/disclaim.htm This report is based on sources believed reliable and makes no specific investment advice. Before you invest in anything, seek professional advice and remember, you can only spend it once!
Review: The Fundamental Premise
With what's left of 2001 quickly slipping over the event horizon, I wanted to spend a little time with you this week reviewing the fundamental premise of the Urban Survival website. In a nutshell, it boils down to a couple of really simple concepts:
When I started working on this site in late 1996, the notion that the then hot tech market could fail was decried by early readers as just so much nonsense. "You're just a Luddite!" some would say, while others weren't even that polite.
In the various companies I have worked for, in the intervening years, I have been labeled a "nut" or "doom and gloomer", and yet each of the companies I have worked for has prospered, in no small measure, due to my skeptical view of the world.
I'm would suggest, based on my experience, that even if you see "clear as day" what is going on in the financial markets, and see our future as very much constrained, that you don't go blabbing it too loudly about. People in positions of responsibility who are "in charge" don't like to have their actions questioned. And if, as has happened to me in a couple of situations, the people have power but less intellectual horsepower, they will resent your knowledge. People "in charge" have a desperate desire to be "right", and anyone who suggests something other than their way of seeing the world is in for a rude shock.
He who pays the piper, calls the tune. Even when flat, you've got to dance along and "go along to get along" with a lot of people who are tied into yesterday's way of thinking, but still have the reins of power.
Paul Johnson wrote the one history book, "A History of the American People" that we've kept on the boat through the various weedings through cargo in efforts not to be overwhelmed with stuff in too small a space.
As an aside, much of what we keep on the boat for other reading material is now in electronic format. We have several CD's of books in text form that we can read at our leisure that have been downloaded off the www.gutenberg.org website. Here, you can download MacKay's Memoirs of Extraordinary Popular Delusions (volumes 1-3) for free. With all due regard to Kindelberger, Cohen, and a host of researchers in more modern times, MacKay's work is worthy of great study, perhaps especially now.
As is a rereading of Johnson -- which I undertook during Wednesday and Thursday of this week when I wasn't off looking for a suitable job. Perhaps I'm being too picky, and love my free time for researching and writing, but I can't think of anything much better than lounging in the salon with Bloomberg going, a cold beer when necessary, and a gentle breeze blowing through the boat reading a good history of the last great Depression. Unemployment, when you have sufficient funds in the bank, is not entirely difficult.
A little over halfway through the book, Johnson begins his review of "Superpower America, 1929-1960" and a quest for some basic understanding of what caused the last Depression. One factor he notes is the large increase in credit (or debt, if you want to look at the other side of credit as someone taking on a debt):
"Although the amount of money in circulation remained stable - $3.68 billion in dollar bills in circulation at the beginning of the 1920s and $3.64 billion in 1929 - credit was expanded from $45.3 billion on June 30, 1921 to $73 billion in July 1929, a 61.8% expansion in eight years."
"The White House...Congress, the federal banks, and the private banks too combined to inflate credit" ... But again, the same combination joined to keep interest rates artificially low. It was the stated policy of the Federal Reserve not only to 'enlarge credit resources' but to do so 'at rates of interest low enough to stimulate, protect and prosper all kinds of legitimate business.'"
If the premise that we are Replaying 1929 is to hold water, we would expect to see similar things afoot in today's world: Credit should have expanded at least 60% from 1991 to 2000, and we should see the Fed desperately cutting rates to "stimulate, protect, and prosper all kinds of legitimate business". For this site to have value, these are the kind of broad indicators that must be parallel. So let's look at the facts over on the Federal Reserve's website.
Unfortunately, Johnson doesn't distinguish between revolving and nonrevolving credit, and the Fed does in its tables located at: http://www.federalreserve.gov/releases/G19/hist/cc_hist_mt.html . So perhaps we should run out the percentage changes for both revolving and nonrevolving, and see if either of them meets the kind of growth from June 1991 to June 2000, which we can approximate as being a similar period, in terms of market performance, in the present replay scenario.
Kind of Credit
|June 1991||June 2000||Percent Change|
(In millions of dollars) Ref URL: http://www.federalreserve.gov/releases/G19/hist/cc_hist_mt.html
I don't think it takes a rocket scientist to figure out, based on how close the numbers are between the 60.1% increase in our nine year study period, and the eight year corresponding period in the 1920's, that what Johnson was probably looking at was the non-revolving credit figures. Indeed, when you look at the balance of the credit figures in the Fed tables, you will find only non-revolving credit numbers until January of 1968.
So at least this part of the 1929 period seems to line up correctly. Now let's turn our attention to a few other data points that we would expect to see match up well between the 1929 experience and the 1999-2001 period when generalized.
Johnson notes that "Between 1919 and 1929 there was a phenomenal growth of productivity in the U.S., output per worker in manufacturing industry rising by 43 percent." Do the figures in that 1990-2000 period come anywhere close? We find the Bureau of Labor Statistics numbers show:
|Original Data Value
Series Id: PRS30006092 Duration: % change quarter ago, at annual rate Measure: Output Per Hour Sector: Manufacturing
Again, Johnson is not extremely precise in the source of his data for the 1919-1929 period, after all you can't footnote everything in a 1088 page book, but a simple summing of the annual change at 40.1%, with the real increase several more percentage points greater because the annual change compounds works out as follows using 100 to illustrate the compounding effect and demonstrate the 10-year productivity trend:
OK, so Johnson says there was a 43% increase in the 10-years leading up to the greatest crash in modern history and my figures based on the Bureau of Labor Statistics figures, show that we have just had a 48% increase in what is a corresponding 10-year run up to the top. Makes you think, doesn't it?
Joseph Paul Water's work, in "Technological Acceleration and the Great Depression", attributing rural electrification, chemicals, and radio along with autos notwithstanding, Johnson follows Ely (Ely, Robert T. "Hard Times: The Way In, the Way Out") in ascribing much of the roar of the Roaring Twenties to automobiles:
"The Twenties boom was based essentially on automobiles. America was producing almost as many cars in the late 1920's as in the 1950s (in 1929 5,358,000 against 5,700,000 in 1953). The really big and absolutely genuine growth stock of the 1920s was General Motors: anyone who in 1921 had bought $25,000 of GM common stock was a millionaire by 1929, when GM was earning profits of $200 million a year."
You know what I'm going to tell you, right? No, I won't say it myself. I'll simple refer you to the Irwin-McGraw-Hill website for "Contemporary Management", (Second Edition) where we find:
"One does not have to be a statistician to realize that the growth statistics for Microsoft Corporation are staggering. For example: If you had purchased Microsoft stock at the original public offering in 1985, it would have increased in value by 54,757%. In other words, the market value of 1,000 shares of Microsoft has a current value of approximately $11,500,000. In 1985 the value of 1,000 shares was a mere $21,000."
Now to be sure, Microsoft stock has done better than GM did in the Roaring Twenties, but remember too that the $11.5 million valuation for Microsoft covers a slightly longer period than did Johnson's GM example. The Microsoft example covered 1985 to 1999, an additional four years. And four years when the tech sector did extremely well.
But that gets us to an even more important point about how the pending Second Depression is shaping up. It's taking longer and going slower. To be somewhat more precise, it seems to be taking about 1.2 to 1.25 times as long for events to unfold. One reason may be the velocity of information is much greater now than it was in the 1920s. If you look at what causes panic in the markets, its when expectations of the participants change rapidly. Today, because of excellent communications within the markets, thanks to the growth of computers and online news services, the expectations of various players are relatively uniform. This aspect of expectations is called endogenous - or expectations from within the market.
When markets tend to move dramatically, and as was demonstrated by the tragic events of 9/11, is when there is an outside shock - or exogenous event that triggers panic. It's here that markets are at greatest risk in the short term, but in the long term, steadily declining expectations are what make major bear markets so ugly.
Let me propose to you that this bear market is now just beginning to get underway. If the length of the previous bear market is a guide, a decline 25% longer than the slide from 1929 through 1937, which most economists admit is the bottom of the secondary depression of that period, should be expected.
This is not a pretty picture. What it means is that we could be facing a 12-year slide from 2000's lofty prices. What's frightening to me as a value-seeker is that because earnings are still falling faster than prices, the market continues to be overprices.
Sure, there are plenty of other data points that match up, but I won't try to cover them all at once. I'm still haunted by one data point that might match up: The possible replay of Osama bin Laden as Hitler that I passed along from a reader last week. With Tora Bora taken, and with the official "war" over, and no sign of OBL, the possibility that OBL could be reported "held in custody" by some unfriendly country, wouldn't surprise me. Nor would word in a year or so that OBL is writing a book that details his plans to take over the world on behalf of fundamentalism. Just like Hitler wrote his in jail.
Those kinds of developments aren't in the news yet. But should they come to pass, it will only underscore the danger of the times in which we live.
Squint at the charts and think about it:
If I were speculating on which way the market was going to head, I'd have to give two possible outcomes in the short-term.
There are lots of reasons to be cautious, not the least of which is the unemployment situation. Until we see some new major driver come along that will increase employment and stimulate consumer demand, free money (zero interest rates in practical terms) won't do it. The recession could slide much longer than expected. But that's always the case of major bear markets...they grind down investors over time, giving only periodic buying frenzies to keep the hopes of small investors alive. Even the mightily touted X-Box won't save us from the slide. It's simply not big enough.
Landry Asset Management Update
Periodically, Robin Landry sends me his client letter, which I pass along to you because it's generally well-thought out and it tends to give a more balanced view of my crude Elliott Wave interpretation of the markets. Here's his latest:
Since my last update in November, the Dow Jones Industrial
average has followed the pattern I mentioned, and reached the 10,100 area.
In that report, I said it would be a positive sign for the intermediate
future if it could move up decisively through that level, so far that has
not happened, but could over the next few days. I have said to many of you
over the last few weeks that this pullback will be the first one since the
top in March 2000 that will provide a low risk entry point. Notice I said
low risk, not no risk. I will use stops on each and every purchase to ensure
not getting caught in another huge decline, which is still possible,
although the probability of that happening has diminished greatly. If the
market can close over 10167, and them 10300, the outlook for continued
up moves in the market look good for several months, possibly until April
Morgan Stanley's Barton Biggs lashed out on the market's recent euphoria,
indicating that it is "pure madness that the tech bubble is being inflated
While Biggs said he continues to believe the panic selling in September
likely marked the primary lows of the current bear market, he adds that the
"celebration" taking place in the marketplace is "excessive and premature."
"I think there is still a lot of 'event' risk out there and I don't believe
in the V-shaped recovery in the economy or profits. Most earnings estimates
for 2002 are too optimistic for a low-nominal-GDP world," Biggs said in a
note to clients.
Biggs maintained that lower rates and liquidity won't revive the consumer,
who will remain impaired for several years.
"Rejuvenation takes time. The bust we have had is not commensurate with the
size of the boom," Biggs said. The global strategist still looks for a
retest of the Sept. 21 lows in the coming months. (1)
The question still remaining is; will that test be successful, and when will
it happen? I will endeavor to keep you informed and positioned accordingly.
There has been some positive things happening over the past month. The
market has rebounded nicely in many area's, and the stress of watching
monthly statement values go down has abated for now. When the US Government
stopped issuing 30 yr T-Bonds it caused a huge decline in interest rates
short term, which is why the market run has been so good in the last few
weeks. The market has now begun to focus on the earnings of companies and
they are likely to be anemic for the new few quarters, so interest rates are
destined to continue to decline. I believe the FED will lower rates
again, for the 11th time this year, when they meet next Tuesday December
Those of you who live off interest, and have seen the rates on CD's drop
below 3%, need to contact me to see what options are available to you to get
higher rates with little of no risk. Some of the options include FNMA Bonds
at 6.5%, are rated AAA, and pay interest monthly. Those of you in higher tax
brackets can invest in Tax Free Bonds at 5% with no state or federal taxes.
I mentioned another option in the email last month, which guarantees a rate
of 5%( rates change monthly) for 5 yrs and allow you to still participate in
the stock market, if it goes up, with NO DOWNSIDE risk. As always, if you
have a question, comment, or concern, don't hesitate to give me a call.
Last of all I want to wish you a Very Happy Holiday season, and a most
Prosperous New Year!!!
E. Robin Landry
Landry Asset Management LLC
(405) 275-6162 local phone or
(405) 275-2620 fax
This is neither an offer to buy or sell any securities. Mutual funds and
Variable Annuities can only be sold by Prospectus. Always read the
prospectus carefully before investing or sending money. All information is
obtained from sources deemed reliable, but not guaranteed. No tax or legal
advice is given or intended. We cannot guarantee receipt of, nor the timing
for placement of, investment orders received via e-mail.
(1) CBS MarketWatch 12/5/2001 www.cbsmarketwatch.com
Reader Dick S. passed along this little gem of a news release, which when you take it in with the same view as the latest report on the public debt that the Treasury puts up on the web
It gives you the clear vision that the country is running on borrowed money and that might mean borrowed time for the markets...
Comptroller of the Currency
Administrator of National Banks
NR 2001- 99
FOR IMMEDIATE RELEASE Contact: Robert M. Garsson
December 7, 2001 (202) 874-5770
WASHINGTON -- Derivatives held by U.S. commercial banks increased by $3.5 trillion in the third quarter of 2001, to $51.3 trillion, the Office of the Comptroller of the Currency reported today in its quarterly Bank Derivatives Report.
The OCC also reported that earnings attributable to the trading of cash instruments and derivatives activities increased by $641 million in the three month period, to $3.45 billion.
“Growth in over-the-counter derivatives resulted from heavy debt issuance and continued strong corporate demand for risk management products. In turn, that growth contributed to relatively strong trading revenues,” said Michael Brosnan, Deputy Comptroller for Risk Evaluation.
Mr. Brosnan noted that while the record notional amount of derivatives is a reasonable reflection of business activity, it does not represent the amount at risk for commercial banks. The risk in a derivatives contract is a function of a number of variables, such as whether counterparties exchange notional principal, the volatility of the currencies or interest rates used as the basis for determining contract payments, the maturity and liquidity of contracts, and the credit worthiness of the counterparties in the transaction, he said.
The report noted that total credit exposure, which consists of both current credit exposure as well as potential future exposure, increased by $53 billion, to $560 billion, in the third reporting period.
“Credit exposures get the lion’s share of our attention at the OCC for a number of reasons,” said Mr. Brosnan. “First, credit is the most significant financial risk in this business. Second, the longer tenors of the contracts we see banks booking increases the potential credit exposures. And, of course, the overall economic situation warrants extra vigilance on the part of bankers and regulators. Although the numbers are very large, our examinations have found the quality of counterparty exposures to be reasonably strong and credit risks generally well controlled.”
Although credit exposure increased during the quarter, Mr. Brosnan underscored that “the benefits achieved from legally enforceable bilateral netting eliminated $583 billion of credit risk from over-the-counter contracts.”
The report noted that only a small fraction of derivatives contracts were 30 days or more past due. Those contracts amounted to $49 million, or .009 percent of the industry’s total credit exposure from derivatives contracts.
During the third quarter, the notional amount of interest rate contracts increased by $3.5 trillion, to $43.1 trillion. Foreign exchange contracts decreased by $48 billion to $6.6 trillion. This figure excludes spot foreign exchange contracts, which decreased by $44 billion to $396 billion. Equity, commodity and other contracts dropped by $12.6 billion to $1.14 trillion. Credit derivatives increased $8 billion to $360 billion.
“Credit derivatives rose after they were basically flat the previous quarter,” Mr. Brosnan said. “That market is just getting over some legal uncertainties related to definitional issues regarding payout events. Additionally, given overall economic concerns, the cost of buying credit protection had increased significantly on many reference entities, which reduced activity. Now that the legal problems appear to be resolved, and the cost of protection has come back down, we expect to see this product begin to grow again.”
The top seven commercial banks engaged in derivatives account for 96 percent of the total notional amount of derivatives in the commercial banking system, with more than 99 percent held by the top 25 banks.
The OCC third quarter derivatives report also noted that:
· Revenues from interest rate positions increased to $1.6 billion, up $200 million from the previous three months, while revenues from foreign exchange positions increased by $578 million to $1.5 billion. Revenue from equity, commodity and other trading positions decreased by $136 million to $391 million.
· Long-term contracts (those with maturities of five years or more) increased from the second quarter by $1.4 trillion to $10 trillion. Notional amounts for contracts with maturities of one to five years grew in the third quarter by $1.1 trillion to $13.8 trillion. Short-term (less than one year) contract notional volumes increased by $820 billion to $16 trillion.
· The number of commercial banks holding derivatives decreased by 8 to 359.
A copy of OCC Bank Derivatives Report: Third Quarter 2001 is available on the OCC Web site: www.occ.treas.gov.
# # #
The OCC charters, regulates and examines approximately 2,200 national banks and 52 federal branches of foreign banks in the U.S., accounting for more than 54 percent of the nation’s banking assets. Its mission is to ensure a safe and sound and competitive national banking system that supports the citizens, communities and economy of the United States.
From the Poop Deck:
Food: I notice that prices are still holding pretty much stable. We have been finding some fair prices on rum, a real hellavah deal on Natural Light Beer ($4.79 a sixpack), but meat prices aren't anything to write home about. We did pick up from tenderloin fillets at Henry's for $5.69 a pound, but ended up cutting off about 1/6th of it because there was a lot of fat on the bottom side. Still, soaked in garlic, olive oil, ginger, sugar and soy sauce for a day, it barbequed up just fine. Shelter: We're still evaluating the input from the public side of the site in answer to the question "If the crap hits the fan, should we stay on the boat, wander from U.S. port to U.S. port, or take off and sail for somewhere like New Zealand? Interestingly, both Panama (my brother in-law whose web site will be added to this coming week) and Elaine keep mentioning the idea of going to someplace like St. George, Utah, and buying up a bunch of land and putting together a paid-up farm. I have to admit that's not a bad idea. I love to do construction projects. In the short term, though, and because prices are still falling, Elaine & I are interviewing to be apartment managers of a nice facility about 7-minutes from the boat and I've got several job prospects lined up. BTW, if you find yourself laid off by the swinging of the axe in the halls of corporate America, don't put your old high salary on your resume. Hold that out for later. Scares hell out of people when you tell 'em, "Yeah, I made about $130,000 this year, but I will work for less..." Folks wonder why... It doesn't seem to occur to them that the economy is in the midst of tanking. Communications: We got out and saw Harry Potter (don't know if I mentioned this) and it was worth watching just from the scenery in it. Plot was so-so, but it was entertaining. One thing I didn't give raves reviews to was the John Williams soundtrack. In movies like Indiana Jones and the Holy Grail, or Raiders, or Superman, or many of his other works, Williams' themes have been simple and repeated in different ways. In Harry Potter, Williams' theme gets lost in the orchestration, if you follow my drift. If you see the movie, tell me I'm wrong, but it seems to me that great good music is characterized by a strong theme with many variations. Just ask the Lone Ranger about the Wm. Tell overture. The theme in Potter got lost, or perhaps that's why I write about 1929 instead of the 1812...(arrggghhhh) Transportation: We keep seeing car prices come down. Where we saw this was on a day trip to Tijuana. We got a good ride on the San Diego Metro "blue liner" down to the San Ysidro border crossing. Absolutely zero formalities going into Mexico. Just get on the bus, off the bus, and start fending off the street urchins. But on the way back? A one hour plus line to walk across at the border. Good burgers and cheesecake at the Hard Rock in Tijuana and we're looking forward to Ensenada over Christmas week. Key Discovery: No prescription needed for drugs in Mexico. Viagra is $15 a pill or 10 for $70 generic - just looking, and no we don't need them, but I was curious if we ever get old how much that would add to the nursing home bill...$80/week I reckon.... My eczema ointment was only $8 a tube (cheaper than a doctor visit with a co-pay), and you can score all kinds of Cipro and Doxycyclene type antibiotics at a reasonable price. Energy: Gas prices are down, and I would not be surprised to see them stay extremely low this spring and into the summer. Two things will drive that: One is the low oil price among OPEC members and competitors. The other thing is the unseasonably warm weather for the month on the East Coast. Low consumption of oil stocks will mean an early conversion to gasoline production in the spring. This ultimately means that the cheapest cost-per-mile commuting might come from a 10-year old car for $1,500 instead of a new "free one" (well, zero down and $200 per month) at least for a year or two. Environment: You'll see more people out fishing during the week as the unemployment rate is up and a lot more people shopping and just hanging out during the week. But major initiatives like green space legislation and federal land grabs for parks are likely to be under the gun a bit. When people are unemployed, they are more interested in government spending programs that put people to work, instead of driving people off their land. Finance: I would expect the Fed to drop only a quarter point this week, and save the next quarter in case they need it (which they well may) for their January or February meetings.
Calendar: Tuesday: Fed Meeting, Wholesale inventories; Wednesday: Import prices; Thursday: PPI and Retail sales; Friday:
CPI and Capacity Utilization. The following week is option expiration this month.