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Contributed by Bill Bonner
Publisher of: The Fleet Street Letter



Today:  Imagination

*** Wall Street closed yesterday - time to take stock...has 
a recession already begun? Analysts weigh in...

*** Four elements of the New Economy...will the dollar go 
up?...S&P earnings growth: zero...

*** Euroland is booming...and the King of England can drop 

* * * * * * * * * Advertisement * * * * * * * * * * * * * *

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. seems that everyone believes that Alan Greenspan 
has engineered 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 Coming Economic Crisis
* * * * * * * * * * * * * * * * * * * * * * * * * * * * * *

*** Wall Street was closed yesterday. So, maybe this is a 
good opportunity to take stock. 

*** A Financial Times article outlines the articles of 
faith of New Economy believers: 1) the business cycle is 
dead; 2) capital markets now work in a new way; 3) current 
technological progress is unprecedented; 4) an information 
technology economy works differently from a machine-age 

*** So where does the New Economy stand? In just the last 
few months we have seen evidence that the business cycle is 
not dead...for we have entered a cyclical slump of unknown 
dimensions. Capital markets are bigger, and more global, 
than ever before. Developments in securitization and 
derivatization have served to amplify cyclical trends - but 
we still don't know to what ultimate effect. The 
technological progress of the last 10 years was 
unique...but not unprecedented. 

*** Any of the 5 decades before 1940 may have actually seen 
more revolutionary progress - with the advent of internal 
combustion engines, electricity, radio, automobiles, 
penicillin and so forth. And the info tech economy doesn't 
seem to work any differently from any other economy. For 
all the blather about the value of information and 
knowledge - it turns out that neither are worth anything 
unless put to the service of an otherwise valuable, 
profitable undertaking. And then, what is needed is not 
abstract "information" or "knowledge" but very specific 
skills and know-how that can only be learned at great 
expense and considerable investment of time.

*** My friend, Brian Smith, reports - for example - that 
after numerous efforts he discovered that this intellectual 
capital was not sufficient to the task of "dry stacking" 
stonewalls in Western Virginia. Use cement, Brian, lots of 

*** Marc Andreessen, founder of Netscape, believes the U.S. 
is suffering from a "massive champagne hangover." 
Interviewed by the Financial Times, Andreessen said "The 
era when everything will be free [on the Internet] is 

*** A year ago, Byron Wien, Morgan Stanley's U.S. economic 
strategist, predicted "10 Surprises" for the year ahead. He 
was remarkably accurate - 7 came true, including a 
prediction that oil would go over $20 a barrel and that the 
Japanese stock market would fall below 15,000. 

*** Now, Wien says he thinks the dollar will go up, not 
down, in 2001 - with the euro falling as low as 75 cents. 
Well, who knows?

*** Only three weeks ago, Merrill Lynch predicted 5% growth 
in S&P 500 earnings. Now, the forecast has fallen to zero - 
with declines of 3.4% in the first quarter of this year and 
a decline of 5.2% in the second quarter, compared to the 
year before.

*** Meanwhile, Richard Berner, chief U.S. economic 
strategist at Morgan Stanley Dean Witter, says that a 
recession has already begun. He believes the U.S. economy 
went into recession in the last quarter of last year.

*** And Robert J. Barbera, chief economist at Hoenig & Co. 
expects S&P profits to fall 7% to 10% in the first half of 

*** A year ago, the AOL/Time Warner deal was worth $160 
billion. Now, it's worth only $105 billion. Still, that's 
better than Yahoo! which lost 90% of its value in that 
same time.

*** A Salomon Smith Barney report shows Bank of America to 
be most exposed to bad loans. BOA could suffer $4.24 
billion worth of defaults this year, says the report. Other 
banks with big loan default risks (in order): Bank One, 
J.P. Morgan Chase, First Union, Fleet Boston, Bank of New 
York, KeyCorp, Wachovia, U.S. Bancorp, Commercia.

*** But "there is cause for optimism," said Harry Davis, a 
professor of the dismal science, "the Federal Reserve's 
decision to cut interest rates earlier this month should 
make it easier for corporate borrowers to pay off their 
debts." Is that so? See below...

*** While U.S. retail sales slumped in December, and U.S. 
automakers have trouble selling cars - even with zero 
percent financing - Germany, France and Italy enjoyed 
record sales during the holiday season. Royal Ahold, a huge 
Dutch retailer, said sales had jumped 50% over a year ago. 
And German automakers, Volkswagen, Porsche and BMW, report 
record sales and profits.

*** Europeans have very low debt levels and only 5% of 
their wealth in stocks, compared with a 25% exposure to 
stocks in the U.S. They are much less vulnerable to the 
negative wealth effect of falling stock prices and debt 
defaults. Euroland is expected to grow by 3.2% in 2001 - 
faster than the U.S.

*** Euroland - 15 countries...13 big happy 
family. One of the major achievements of the last half of 
the 20th century is that the European wars seem to have been 
put behind us. Now, tensions between European governments 
tend to be comic rather than tragic. 

*** Even at the scout meeting in far Poitou, the organizers 
could not resist singing a song which must have been a 
relic of the 100 Years War. "Hooray for the King of 
France," the scouts sang, in French of course, "and the 
King of England can drop dead!" The two English parents in 
the audience did not find it very funny.

*** And a little news on the tax front... "This week the 
OECD's attack on tax havens suffered a major setback." 
writes the Sovereign Society's Bob Bauman, "As that 
notorious G-7 front group was forced to back down from its 
high handed demands at a meeting Barbados. OECD minions 
were forced to accept creation of new a joint task force 
including both OECD and tax haven nations, giving 
blacklisted nations 'a seat at the table' and a forum for 
their complaints and defense."

*** "It does not surprise people when I tell them that the 
most important tax haven in the world is an island," writes 
tax lawyer Marshall Langer. "They are surprised, however, 
when I tell them that the name of the island is Manhattan, 
in the United States. The world's second most important tax 
haven is also located on an island. It is a city called 
London in the United Kingdom." (see: Harmful Tax 
Competition-The Real Tax Havens

* * * * * * * * * Advertisement * * * * * * * * * * *

Your government may not want you to know this: but at the 
click of a button you can be banking in Switzerland; buying 
offshore mutual funds in Luxembourg; setting up tax haven 
corporations in the Caribbean; buying securities in
Germany, Canada, Indonesia... 

In fact, you can be transferring assets into some of the 
world's strongest and most private offshore banks and into 
some of the world's most powerful offshore asset protection 
vehicles organizing your finances just as the super rich 
have done for decades. 

To discover how, just click! 
* * * * * * * * * * * * * * * * * * * * * * * * * * *


"No one can draw more out of things, books included, than 
he already knows. A man has no ears for that to which 
experience has given him no access."

Friedrich Nietzsche

So, where are we? Are the Internets really coming back? 
Should you prepare for a new boom? Or will things just 
drift along without much change?

No one knows. But it is the things you don't expect that do 
you most damage. And what people least expect is what they 
cannot imagine.

We only know things by reference to experience, analogy and 
metaphor. But our experience with market conditions similar 
to those of today is limited, and largely historical. 

Dr. Kurt Richebacher recently compared market conditions 
today with those of 62 years ago: In September 1929, the 
price-to-earnings ratio of listed corporate stock stood at 
13.5. Sixty-two years later, this week, the S&P 500's P/E 
is around 24. The Dow has a P/E of 29, and the Nasdaq's P/E 
is still near 100.

Between 1925 and 1929, the money supply rose 10%. But 
during the last five year, to the end of 2000, M3 
mushroomed 55%, or more than 5 times as much as the economy 

Dr. Richebacher reports that the U.S. added $500 billion to 
its GDP during the five years since 1995. But the volume of 
credit available to consumers and business rose $1.4 
trillion in 1997, $2.1 trillion in '98, $2.25 trillion in 
'99, and an estimated $1.8 trillion in 2000.

And this credit explosion happened while savings were 
collapsing and the trade deficit was growing bigger than 
any trade deficit in the history of the world.

We know the '29 crash and Great Depression only by 
reputation. Things were tough. But very few people now 
active in financial markets have had any direct experience 
with it. And we lack the imagination necessary to apply the 
information we have. Surely a credit bubble that is bigger 
than the '29 bubble ought to produce at least as much 
debris when it finally explodes. But what sort? How? We 
cannot even imagine it. 

Close your eyes and try to picture a financial calamity on 
a scale with the Great Depression. A quarter of all men 
without jobs...soup kitchens...10,000 banks close their 
doors. All that comes to my mind are black and white 
Depression-era photos. Well, it won't be like that. People 
do not dress as well today. And they drive better cars. And 
banks can't go bankrupt, or can they? But what difference 
would it make? No one has any money in banks anymore. 

My own grandfather was wiped out when his bank in downtown 
Baltimore failed in 1931. I can't imagine that happening to 
me. I put my money in mutual funds, stocks, real estate, 
and federally-insured CD's! 

I'm so much smarter than my grandfather. And the Fed is so 
much smarter than the Fed six decades ago. And the new Bush 
administration is so much smarter than the old Hoover gang. 
And investors are so much smarter, too. Rather than panic 
and sell out - they hold their stocks for the long 
term...and even buy the dips. Gosh...I can't even imagine 
how dumb people were back then - as dumb as the Japanese 
since 1989. But I can't imagine that either.

In fact, with today's investors, today's Fed, today's 
enlightened economists, I can't even imagine a financial 
catastrophe of any sort. Whatever else you can say about 
it, this time, it will be different.

But "every market will eventually find a reason to regress 
to the mean," says veteran Merrill Lynch analyst Bob 
Farrell, interviewed in the L.A. Times. The stock market 
may be a wealth machine, but it is one that produces 
wealth, going all the way back to '26, at the rate of about 
11.3% per year. That number is fattened by the last 20 
years stocks spent in the Wall Street feed lots. During 
that period - from '82 to '99 - the S&P 500 gained 19% per 
year, dividends included. In the more recent period - '94 
to '99 - stocks did even better. The S&P 500 rose at 20% 
per year. 

These recent figures distort the picture for stocks in the 
20th century. Adjusting the numbers in various ways, Andrew 
Smithers and Stephen Wright, in their book "Valuing Wall 
Street", estimated that the real return on stocks over the 
first 97 years of the 20th century was less than 5% 

Clearly, the performance of the period '82 to '99 was 

"After 18 fat years with returns averaging 18% to 20%," 
continued Bob Farrell, "we are likely to have a stretch of 
lean years with returns less than 10%."

But that's not what investors expect. A recent survey 
showed that investors expected to earn 11.8% on their 
stocks over the next 12 months. That's much less than the 
18% they expected a year ago...but still more than twice 
what Smithers and Wright consider the long term, real rate 
of return on stocks...and not nearly low enough to skim the 
grease off this blubbery market.

"The very quality that makes the stock market such a good 
place to invest most of the time," I reprise a familiar 
Smithers and Wright passage, "means that it has to be a 
lousy place occasionally. One of these occasions is now."

There have been other lousy periods. U.S. stocks rose 27% 
per year from June '49 to April '56. Then, for the next 6 
years, investors got only 5.6% per year from their stocks. 

In June '62, a new bull market developed, giving investors 
14.8% annual gains for the next 4 years. But the following 
dozen years were grim - with minus 4% gains each year.

Last year, for the first time since 1982, investors lost 
9.1% on their S&P 500 stocks. Does this mark the beginning 
of a trend, or the end of one?

We will see, dear reader, we will see.

Your reporter, 

Bill Bonner
About The Daily Reckoning:

Daily Reckoning author Bill Bonner

Bill Bonner is, in spite of himself, a natural born contrarian. Early each morning, Bill writes The Daily Reckoning—his take on the financial markets and what’s going on in the world—and sends it off by e-mail before most Americans’ alarm clocks have buzzed. Many readers say it's the first thing they want to read when they get up—not only because it's informative and thought provoking, but also it's inspiring, in its own quirky and provocative way.

Of course, there's much more to Bill than his daily market commentary. He's also the founder and president of Agora Publishing, one of the world's most successful consumer newsletter publishing companies. Bill's passion for international travel and big ideas are reflected in the company he's successfully built. In 1979, he began publishing International Living and Hulbert's Financial Digest . Since then, the company has grown to include dozens of newsletters focusing on health, travel, and finance. Bill has vigorously expanded from Agora's home base in Baltimore, Maryland since the early ’90s—opening offices in Florida, London, Paris, Ireland, and Germany.

Agora's publication subsidiaries include Pickering & Chatto, a prestigious academic press in London and Les Belles Lettres in Paris, best known as a publisher of classical literature in bilingual editions.


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Last modified: April 01, 2001

Published By Tulips and Bears LLC