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Contributed by Bill Bonner
Publisher of: The Fleet Street Letter

OUZILLY, FRANCE 
TUESDAY, 2 JANUARY 2000 

 

Today:  Predictions For 2001

*** And so, the 2nd millennium came to an end...with the Dow 
and the Nasdaq down...

*** Bad week for the Internets - Amazon sinks to $15...

*** Monkey Ward closes stores...gold stocks fall...and 
"Predictions for the Year 2001."

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The landing approach has begun. The flaps are down. A 
moderate slowdown has hit the U.S. economy. Investors are 
still optimistic. But consumer spending is way off. 

Still... it seems that everyone believes that Alan Greenspan 
will engineer a soft landing for the formerly high-flying 
tech bubble. But according to one of the world's leading economists, 
it's worse than blind faith. It's 'high-octane 'new paradigm' 
propaganda. 

Here's what you need to do - right now - to prepare yourself 
for the The Coming Crash: 
http://www.agora-inc.com/reports/RCLF/TheComingCrash
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*** Markets were closed yesterday - not much news to report.

*** The Dow and the Nasdaq ended the millennium on a sour 
note. Both were off on Friday - with the Dow down 80 points 
as the trading year came to a close; the Nasdaq was down 86. 

*** The final week of the 2nd millennium saw a 1% decline in 
the Dow - putting the down in the red 6.2% for the year. But 
small caps rose 5% - leaving them in the hole only 4% for 
the year. 

*** The Nasdaq dropped 4% last week - bringing the index 
down 53% from its high...and 39.3% for the year. 

*** It was a bad week for Internets - a fitting end for what 
has been a bad year. TheStreet.com's Internet index fell 6% 
last week, to leave the Internet sector with a 74% loss for 
the year.

*** Amazon.com, the best known of the Internet retailers, 
and a frequent subject of these letters, has fallen nearly 
90% since Jeff Bezos got his mug on the cover of TIME. The 
stock was quoted on Friday at just $15.56. But even at $15, 
Amazon is probably greatly overpriced. Amazon - that great 
river of no returns - enters the 3rd millennium with no 
proven business model, no profits and more than $2 billion 
in debt. 

*** It was a bad week for the big techs too. MSFT ended the 
year at $43.50. Cisco at $38.25. Oracle at $29.06 And Dell 
at $17.44. Readers will note that these are all much smaller 
numbers than those of the beginning of the year. 

*** Not all stocks fell in the year 2000, however. Floyd 
Norris reports in the NY TIMES that 86% of stocks in the 
health care, finance, energy or utilities areas rose. But 
only 31% of those in technology or telecommunications 
managed to end the year in positive territory.

*** The DJ Utilities Index had a spectacular year - up 46%.

*** Analysts with major brokerage houses are almost 
universally bullish for the new year. A survey of 10 of the 
leading analysts reported in U.S.A. Today produced estimates 
of where the S&P 500 will end the year in a range from a low 
of 1400 to a high of 1715. The S&P 500 begins the year at 
only 1320. Not a single analyst was bearish. 

*** Gold stocks fell 2% last week. I got a letter from tech 
maven Porter Stansberry urging me to reconsider my position 
on gold in light of the fundamental change that has taken 
place in the relationship between gold and money. Since the 
Nixon administration, says Porter, gold has not been money. 
And it doesn't act like money. It acts like a commodity - 
going up during periods of inflation and down during periods 
of deflation. If the credit bubble deflates, gold will go 
down, not up, Porter predicts. More on this tomorrow.

*** The gap between inflation-adjusted bonds, or TIPS, and 
regular 10-year T-bonds, has fallen from 1.90% in mid-2000 
to 1.37% by the end of the year. Investors are not concerned 
by inflation. They don't see it coming and see no reason to 
give up any interest yield to protect themselves from it. 

*** While investors' attention focuses on the Fed's next 
rate hike and the decline in asset prices, Greenspan and 
company are busily inflating. The money supply, as measured 
by M3, rose $56 billion last week, to more than $7 trillion. 
It has gone up $105 billion in the last 4 weeks and has 
risen $1.64 trillion - or about 30% - in the last 3 years.

*** What happens to this `money'? If it finds its way into 
asset prices, a bull market will soon return to Wall 
Street...and all will be well. Gold can stay asleep for 
another year or two. But will it? A prediction, below....

*** "In the time it took America to work out who had won the 
election on November 7," opines the Financial Times, "the 
seemingly unshakeable optimism surrounding the economy had 
been replaced by a sudden onset of fear and gloom. Consumer 
confidence plunged, stock prices swooned and the 
manufacturing sector shed jobs at its fastest rate in 10 
years." A year ago, America was on top of the world. 
"American Triumphalism" was a theme of hundreds of newspaper 
editorials. How times have changed. 

*** Sales of existing homes increased 4.4% in November - 
thanks to lower mortgage rates. 

*** Montgomery Ward is closing down 250 stores, proving that 
you can't make any money selling everything to everybody. 
When I was growing up, `Monkey Ward' as we called it, was 
where we did most of our shopping. 

*** New Year's Eve and New Year's Day passed without 
dramatic incident here at Ouzilly. Madame de Thierry, about 
whom I have written to you in the past, came over for tea 
with her son and his family. The kids played soccer in the 
living room and kicked the ball into Elizabeth's Venetian-
glass chandelier...but it did no damage. Later, we all went 
over to Pierre's for an aperitif - celebrating the baptism 
of his granddaughter. The child's mother nursed the baby on 
the side of the room as friends, aunts, uncles, cousins, 
grandparents...and some relatives whom no one seemed to 
recognize...drank champagne, ignoring her. Later, we had a 
quiet family dinner - we pulled our `poppers', put on our 
funny hats, welcomed the New Year, and went to bed. 

*** Edouard, a friend visiting from Paris, and my son, Will, 
went out after midnight and built a fire near the pond. The 
wind came up. I was afraid they might set the woods on fire. 
But when I got up the next morning, the woods were still 
there. 

*** I'm a little concerned for Mr. Deshais, however. I 
haven't seen him in a couple of days. He should be here. I 
hope nothing has happened to him...or else I will have to 
take care of the geese, turkeys, chickens, ducks and rabbits 
myself. 

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PREDICTIONS FOR 2001

Like the Ghost of Christmas Future, I come to you today.

This is usually an exercise in self-humiliation. No one can 
actually predict the future. And, as there are an infinite 
number of things that might happen, the odds of guessing 
right are slim.

Still, actions have consequences. And sometimes those 
consequences are as obvious and predictable as what you 
might expect when you see a sumo wrestler strapping on his 
skates next to a lightly frozen pond. 

That is what makes the Darwin Awards so entertaining. A 
reader can see what is coming - though the consequences of 
imbecility are invisible to the imbecile himself. 

The most flagrant imbecility of the year 2000 was the absurd 
pricing of Internet and technology shares. An observer need 
not have gutted a chicken nor studied the stars in order to 
see how this absurdity would end. So, I do not expect any 
special applause for my prediction last year at this time 
that "the Rocket Chips will fall to back to Earth." 

Since January of last year, the Internets have felt the 
earth's gravitational pull and have lost 74% of their value. 
Many of them have already struck the ground or been burned 
upon re-entry into the Earth's financial atmosphere.

Nor should I expect any measure of respect for my corollary 
prediction that the blue chips would do relatively better 
than the Rocket Chips, or "old economy stocks will 
outperform new economy issues," as I put it.

Sure enough, Dow stocks have held up pretty well - with only 
a 6.2% loss for the index. And many stocks suggested in 
these pages are up in value - most notably, Philip Morris, 
which almost doubled in value.

My other major predictions for last year were less obvious:

I forecast a decline in "American Triumphalism" and a fall 
in the dollar. I said that "Main Street and Wall Street 
would converge." I suggested that gold, oil and natural 
resources would increase in price...and I probably predicted 
a few other things I would just as soon forget about.

But here we are, dear reader, another year older. Another 
year wiser...and, I hope, another year richer.

"All that really matters," said my friend and ex-neighbor 
Francois last night. "is your health. Everything else you 
can work out. But when your health goes - you're finished."

Francois retired in September. Then, his back gave him 
trouble - to the point where, a couple of weeks ago, he 
could barely walk. Louisette's hand required surgery, from 
which she has yet to recover.

"With a comfortable house, a big stack of firewood, and a 
big garden," Francois made a sweeping gesture with his hand 
to point out the features of his new life in retirement, 
"money doesn't mean much to us. But health? Ah...that's 
another matter...."

You may wonder why, dear reader, I interrupt this look into 
the future with this little vignette from my visit to 
Francois last night... It is only to keep things in 
perspective. This is the nice thing about making financial 
predictions - they don't really matter.

So, recognizing that the predictions that follow are as 
important as they are likely to be accurate, I offer the 
following:

*** Last year, it was the tech and Internet stocks that got 
hit. This year, it will be the overpriced blue chips. GE, 
for example, will fall sharply.

*** Deflation, not inflation, will bedevil the markets and 
frustrate investors. Already, more than $3 trillion has 
disappeared from U.S. capital markets. This was wealth on 
paper that had no corresponding real economy parallel. There 
were no factories, no sales, and no profits to back it up. 
Even after the losses suffered by investors in the year just 
finished, there remains another $5 to $7 trillion in excess 
valuation on Wall Street. Unless the Fed can pull off 
another boom in the credit cycle, more of this paper wealth 
will be destroyed in the year ahead. 

*** Stocks are still much too expensive. The Dow P/E is over 
20. The Nasdaq P/E - even after getting cut in half from its 
high point - is still close to 100. Again, barring a 
successful credit boom - which is unlikely - the Dow should 
sooner or later sink below 6,000...and the Nasdaq should 
fall below 1,000. 

*** The Greenspan Put will prove worthless. Greenspan will 
cut rates. And he will increase the money supply. But these 
efforts will be too little and too late to offset the 
effects of a deflationary collapse. Investors who borrowed 
on their homes in order to buy stocks last January paid a 
high price to play the market - a loss of nearly 30% on 
average. While not yet acting like Japanese, they will be 
more cautious in the year ahead. And businesses, too, will 
be reluctant to add capacity while inventories stack up in 
warehouses. The Fed Funds rates will come down. But the real 
return on borrowed money will remain negative for most 
borrowers. As a result, people will reduce their debt levels 
and begin saving.

*** The U.S. dollar will continue to decline against the 
euro. Against all odds, the euro will rise above $1 - and 
beyond. This will have a number of serious consequences. 
Overseas investors will withdraw funds from U.S. capital 
markets. U.S. dollar-denominated assets will fall in price. 
Prices of foreign goods will rise. And, the trade deficit 
will fall. 

*** Genius will fail - derivative positions total about 10 
times the entire U.S. GDP. Trillions of dollars are tied up 
in positions that are far more precarious than their owners 
think. Coming in 2001 - big bankruptcies. Expect major 
surprises from major players.

*** Bankruptcies and deflation will reawaken the inner child 
in gold - the golden boy of monetary stability. Gold will 
rise in price as investors become concerned about the 
dollar, financial institutions, derivatives and debt. More 
about this tomorrow.

*** Recession will begin before the end of the year and be 
worse than expected and more widespread. Along with Bush and 
Greenspan, globalization, deregulation, securitization, 
derivatization and laissez faire economics will be blamed. 

More to come....

Your correspondent,

Bill Bonner

 
 
 
 
About The Daily Reckoning:
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Bill Bonner, recognized internationally as a brilliant writer, entrepreneur
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Bonner writes his email letter from Paris, France, each morning --
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For nearly 62 year, The Fleet Street Letter, the oldest investment
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Last modified: April 01, 2001

Published By Tulips and Bears LLC