ANNO 2001,
R.I.P.
by Bill Bonner
Forgive me for getting personal, dear reader, but how did you do last year? If you did badly, financially, you can't blame it entirely on us.
Each year, with the enthusiasm of a man going for his annual checkup, we look back at our predictions from the preceding January. We doubt that we are going to enjoy the experience and are a little worried about what we might discover.
But this year's exam passed without too much embarrassment. I have already 'fessed up to being wrong about the dollar. "The U.S. dollar will continue to decline against the euro," we said last year, just as we had the year before. And "gold will rise in price...," we continued, ritually.
At the end of the year, however, the dollar was higher against the euro...and gold had risen, but only slightly. Overall, a reader would have been about even barely.
You will recall that at the beginning of the year, stocks were off and the economy was looking a little squishy. It was a different world back then. TVs in hairdressing salons were still tuned to CNBC and the Fed Funds rate was still at 6.75%. Almost no one doubted that all it would take would be a few quick cuts from the maestro and things would be booming again.
Back then, the Fed chairman was still said to have the "Greenspan put" which guaranteed that the economy would not fall into recession and stocks would not tumble too far or for too long.
Investors widely believed that another
year of stock market losses was practically impossible. "Not since the
'70s did stock prices fall 2 years in a row," they
assured one
another.
And even if the first cut did not do
the job, as Ed Yardeni pointed out, there were still "600 basis points
between here and zero." Thus were economists almost
unanimous in
predicting that the U.S. would continue growing in 2001.
Here at the Daily Reckoning, though,
we had little doubt that the Fed could cut rates - what else could it do?
But we figured it would take more than 600 basis points to correct the
biggest bubble economy of all time. The economy, we reckoned, suffered
from too much credit already. Consumers and businesses had reduced savings
to negligible levels and added trillions in debt. Now they were losing
jobs, sales and contracts...We did not see how lending them more money
would make things better.
"The Greenspan Put will prove
worthless," we predicted. "Greenspan will cut rates. And he will increase
the money supply...the Fed Funds rate will come down. But
the real
return on borrowed money will remain negative..."
"Despite the rate cuts," we continued, almost recklessly, "recession will begin before the end of the year and will be worse than expected and more widespread."
As predicted, Greenspan did cut rates once, twice, three times...and still the downturn got worse. By the end of the year he had reduced the key lending rate by 425 basis points. And the money supply soared. M-3, its broadest measure, increased at a 13.2% over the last year. MZM, a measure of ready cash, went up at more than 20% per annum...
Has all this easy credit and new money
done any good?
Well, we don't know. Maybe. A recession officially
began in March. If it followed the pattern of the average recession since
the '50s, it would be ending now. Maybe
it is. There are some signs of
economic resurgence. Then again, these could be a "head fake," designed to
separate the greedy and the gullible from even more of
their money.
(More on this subject, Thursday, when we provide our predictions for
2002...)
Economists were optimists at this time
last year; investors were bullish. They had not been able to imagine the
losses suffered in 2000. In January 2001 they could not imagine that those
losses would continue.
They felt they had suffered enough. The worst
was over, they said. The bottom had already come, they believed.
Those
were the days when you could still talk about the forecasts of Abby Cohen,
Henry Blodget or Jack Grubman without smirking.
Alan Abelson, in Barron's, gives an
example of one of the most flamboyantly imbecilic of the genre:"This
particular strategist...called for the market to
climb 20%-plus in
2001 and proclaimed this neat advance would be paced by 'technology,
telecom and financials.'
His top five picks...would have returned a
MINUS 57%, and his worth choice 'just missed entering the 99%
club.'"
When on January 3rd the Fed Chairman
cut rates, investors were sure that it was only a matter of time before
the lower rates worked their magic. Prices ebbed and flowed.
The tide
seemed to turn in April, floating the Dow up almost 2,000 points. But then
the washout began again...taking stocks down to a interim low on September
21 from which they've been rallying ever since.
Even with the final quarter rally,
stocks ended the year lower than they began it. But nowhere near as low as
your Daily Reckoning editor imagined. "The Dow should
sooner or later
sink below 6,000," he predicted. Well, not in 2001...but there's always
next year.
We mentioned that we thought
"overpriced blue chips" were particularly dangerous. "GE will fall
sharply," we predicted. GE did fall sharply, from 43.75 down to a low
of 30.37. But it has recovered most of the loss and is currently
trading at $39.36.
We also warned, cryptically, that
there would be some "big bankruptcies...expect major surprises from major
players." We might have been describing Enron. Of
course, at the
beginning of the year, we didn't know the status of Enron's finances any
better than its CFO. But we guessed that a decade of debt and speculation
was
bound to produce some big accidents. And, we doubt we have seen
the last of them.
Finally, we expected investors to be more "cautious in the year ahead," and consumers, we thought, would "reduce their debt levels and begin saving." Maybe we were too early with these predictions. Maybe we were dead wrong.
We will see. 2001 is gone. R.I.P. But 2002 is a new year, offering plenty of opportunities to make fools of ourselves.
Bill Bonner
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