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Contributed by Bill Bonner
Publisher of: The Fleet Street Letter



Today:  Gone With The Wind

*** Another rate cut coming? Investors think so...and they 
think they know what it will mean...

*** Fed in Bubble Mode...Bush's tax cut... what budget 

*** Gold derivatives...lost in the forests...collector 
cars...and French mistresses...

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*** Investors are looking forward to next week. The FOMC 
meets and is widely expected to cut the Fed Funds rate by 
50 basis points. Futures trading shows investors put an 86% 
probability on a rate cut of 50 bps.

*** Over the last 18 years, investors have learned that it 
is usually unprofitable to fight the Fed. When the Fed cuts 
rates - stocks rise. 

*** And so, in anticipation of another breath of hot air 
into the bubble economy, investors boosted up the Dow by 71 
points and the Nasdaq by 82. There was not much rhyme or 
reason to it - other than the hope that things will be 
better now that Greenspan & Co. are back on the pumps.

*** "No matter what you read or hear about widespread 
bearish sentiment," Marc Faber wrote recently, "the fact is 
that investors and strategists have remained stubbornly 
optimistic... brokerage industry strategists are now 
allocating a record 64.7% of their clients' assets to the 
stock market, which is by far the highest in the history of 
this indicator. [And according to Investors Intelligence] 
...52.9% of advisers are bullish, which is just within 4% 
of the all-time high figure in January and March of last 

*** The Fed is in bubble mode. MZM (money of zero 
maturity...or cash as it is commonly called) is rising 
almost 5 times as fast as the economy itself...that is, at 
a 12.9% annual rate. Adjusted reserves are soaring at a 
16.7% annual rate.

*** This is, of course, inflation: more money relative to 
the goods and services that it can buy. Will it produce an 
increase in the consumer price index? An increase in stock 
prices? Or nothing at all?

*** While the Fed tries to pump up the bubble economy... 
there are still some serious leaks. Earnings, debt, 
bankruptcies. If investors lose confidence - they can whack 
the markets for a 10%...20%...or even 50% loss in a matter 
of days.

*** Let's go back to the big numbers. The stock market is 
worth $14 trillion. Even a 10% drop would mean a loss of 
capital (money) equal to $1.4 trillion. How much would a 
12.9% increase in MZM offset that? Not much, dear reader, 
not much.

*** And, there's Bush's tax cut. There's another $500 
billion that might be made available to consumers...that 
should get the bubble air stirring, right? But, again, it 
represents less than a 5% move in stock prices. When this 
market is ready to go down...neither rate cuts nor tax cuts 
are going to stop it. 

*** Is it ready to go down now? Well, not yesterday. Twice 
as many stocks rose as fell on the NYSE yesterday. 140 hit 
new highs, while only 7 hit new lows.

*** In Bill Clinton's final budget, a federal surplus is 
projected of $4.42 trillion for the years 2001-2010. But 
economists at say that the figure will be more 
likely $1.8 trillion. And that it won't be a surplus, they 
predict, but a deficit. All you have to do, says, is change a few of the assumptions about the 
stock market over the next few years and you get a very 
different result.

*** The NY Conference Board's Index of Leading Indicators 
fell for the 3rd month in a row. It dropped 0.6% in 
December, its sharpest decline in 5 years. Three 
consecutive months of falling figures is usually an advance 
warning of recession.

*** Here's another interesting note to log in the "Too Big 
To Fail" category: "Bank One's bad consumer loans were 61% 
higher last quarter than they were the previous year," 
reports the Motley Fool. "Additionally, Bank One took a 
pre-tax write-down of $575 million for currently impaired 
assets, including vacant real estate and abandoned car 

*** Friend Justin Ford writes: "The nation's plummeting 
savings rate is not a new phenomenon... did you know, 
Irving Fisher died penniless? Apart from being the Fed 
chairman during the '29 crash, Fisher was a renowned Yale 
economics professor and entrepreneur in the 1920s and 
1930s. He had built a multi-million dollar fortune. But he 
also neglected basic lessons about investing... Yale had to 
buy the house he was living in so he could live out the 
rest of his days there." Justin's been working on a program 
called 'Seeds of Wealth' designed to help young people 
learn the value of saving and investing. I'll tell you more 
about it later.

*** The dollar went nowhere yesterday. Oil fell 23 cents.

*** The Bank of England's gold auction was oversubscribed 5 
times over. There were plenty of buyers for gold - but the 
price of the metal fell 30 cents yesterday. The mining 
index, XAU, lost 2%. 

*** Marshall Auerbach, on the uncalculated threat of 
derivatives: "Ashanti Gold, a large West African gold 
producer, was not the first mining company to enter into 
gold hedging arrangements via the OTC derivatives market. 
But the derivatives used by Ashanti to undertake such 
hedging were unusually complex ... to the extent that 
nobody in the marketplace could truly understand them. 
Investors were fobbed off with the argument that the 
company had the situation 'well in hand', when questions 
about these exotic hedges were posed. 

*** Then, "when the European central banks surprised the 
gold market in the autumn of 1999," continues Auerbach, 
"with the announcement of the Washington Accord (an 
agreement to restrict the amount of gold sold by the 
European central banks to a fixed quantity over the next 5 
years), the gold price soared un unprecedented $80 in just 
4 trading days. Unfortunately for both [Ashanti] and its 
shareholders, Ashanti's derivatives' bet did not 
incorporate this sort of rapid price spike as one of a 
possible range of scenarios ... the resultant margin calls 
pushed the company to the brink of bankruptcy. Seventeen 
major bullion banks had exposure to Ashanti, yet NONE were 
able to quantify the extent of their liabilities until one 
of the Goldman Sachs's 'rocket scientists', who helped 
design the original derivatives contracts for Ashanti, was 
parachuted across the Chinese Wall and able to make the 
relevant calculations. 

*** And yet, "OTC derivatives in the gold market," says 
Auerbach, "are but a tiny irrelevance in relation to the 
trillions of dollars of exposure in the area of interest 
rate and foreign exchange derivative structures..." (see: 
The Great Looming Threat To Financial Markets)

*** "The world of Wall Street spin is like a dozen 
simultaneous games of 3-dimensional chess," writes Howard 
Kurtz in his book Fortune Tellers, passed on to me by Harry 
Schultz, "...a dizzying match in which stock prices, 
corporate earnings & millions of individual investments are 
riding on the outcome. Amid the endless noise, whom do U 
trust? ... Street analysts have too much power, for the 
media mindlessly trumpets their predictions as if set in 
stone. And if the assessment turns out badly wrong, well, 
too bad. Zero accountability." 

*** Schultz adds: "Analysts praise company stocks while 
trying to win that firm's investment banking biz, & few 
make the connection. Via airwaves & press, fund managers 
tout stocks in which they're long. Rarely are they asked if 
they own the stock, & even if they admit it, no one 
screams: interest conflict!"

*** "Martha Stewart Living has swept Wall Street off its 
feet right along with the rest of the world," says 
GrantsInvestor analyst Rosa Ann Tortora. "But as cracks 
begin to show in this fabulous facade, investors may want 
to reconsider their paean to gracious living." The company 
currently trades with a p/e of 55 and a $1 billion market 
cap. But, according to Rosa Ann, Martha's Internet project 
is hemorrhaging cash. And she thinks there's some money to 
be made on the short side. (see: Running Out Of Style?)

*** The collector car market is still hot, says the Arizona 
Republic. Two recent auctions produced record sales and 
turnout. A '34 Ford street rod built by Boyd Coddington 
sold for $130,680. A '35 Duesenberg sold for $1.045 
million. A '68 Shelby GT500KR sold for $85,575.

*** A front-page article in The International Herald 
Tribune warns that Europe's forests are in bad shape. 
Nowhere does the paper explain that European forests are 
victims of European government - which pays farmers to 
plant unprofitable crops on land that would otherwise go 
back to wilderness.

*** And poor Christine Deviers-Joncour. The woman was paid 
$9.25 million dollars by oil company Elf Aquitaine. And now 
she is being forced to explain to a court why her services 
were so valuable. The money, it is alleged, was a bribe to 
former French foreign minister Roland Dumas, to whom she 
was mistress. Christine says she worked tirelessly for the 
money. Yes, Judge Sophie Portier said: "You put your body 
and soul into the job." 

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"There's just as much money to be made in the wreck of a 
civilization as the up-building of one."

Rhett Butler

In ante-bellum Georgia, few people could imagine what a war 
with the North might bring. They knew wars took courage... 
horsemanship...and discipline. They figured they had 
plenty, and boasted, in the words of one of the Tarleton 
boys in Margaret Mitchell's novel, that they could "lick 
the Yankees in less than a month."

But it was not to be. After 4 years of struggle, the south 
was beaten, devastated, and occupied by a foreign army. It 
was a new era, after all.

Things do change. New Eras do come along, but only at great 
cost...and unexpected suffering.

"Practically breaking the bank with a $3 million publicity 
campaign," reports Frederick Sheehan in his Quarterly 
Market Review for John Hancock, "Warner Brothers' escapade 
swept the nation."

Sheehan was not referring to 'Gone With The Wind,' which we 
made our entertainment last Saturday night, but to another 
film which revolutionized the movie industry - The Jazz 
Singer, the first talking picture, released by the then 
third-rate studio, Warner Brothers. 

"Predictions for this new technology were mixed," writes 
Sheehan. "The reasons for this ambivalence were many, 
including the terrible quality of the sound." Said Tallulah 
Bankhead of the audio: "They made me sound as if I'd been 

But you can't stop a good innovation. Soon, "everyone in 
Hollywood was ...scrambling for money, and in the heat of 
the bull market , it was easy enough to borrow and then 
borrow some more. By 1933, the technology was standardized 
and much improved, 99.5% of all movies were now 

If ever there was a new technology that was a winner - it 
was talking pictures. We do not have to consult the dusty 
tomes of economists for proof. Nor do we need to stretch 
our imaginations. All we have to do is to open our eyes. 
Everywhere you go in the world, or nearly everywhere, you 
find U.S.-made movies. It is Planet Hollywood. American 
movies...and the actors and actresses who make them ...are 
known worldwide. They are among our most successful and 
most profitable exports. 

The old era of silent films fell faster than the 
confederacy. Only a few years after the introduction of 
'talkies' they were being watched by crowds of millions. 
Even Josef Stalin loved American films. He worked until the 
wee hours of the morning - personally approving the lists 
of hundreds, sometimes thousands, of people who were to be 
murdered. Then, his labors finally over for the day, he 
retired with a few henchmen to a private studio...not to 
discuss Karl, but to watch Groucho.

Surely investors who put their money in this world-changing 
new technology were richly rewarded. Alas...what a 
confusing, frustrating...and astonishingly baroque world we 
live in. Sheehan reports that by 1933, "the entire motion 
picture industry had defaulted on its debt (there was one 
exception: Loews). The studios struggled to survive."

What went wrong? The studios were trapped by technology as 
well as enriched by it. They were forced to invest huge 
amounts of money [like today's telecoms or Internets?] in 
order to remain competitive. "They had no choice," explains 
Sheehan. "Profits of the industry tripled between 1927 and 
1929. They had achieved this apparent success, but at an 
enormous cost. ...The industrial system as it had evolved 
for the previous three decades needed to be completely 
overhauled; studios and theatres had to be totally re-
equipped and creative personnel retrained or fired. In 
order to fund this conversion, the film companies were 
forced to borrow $350 million. What William Fox and Sam 
Warner did not anticipate was a stock market crash."

One of the myths that has grown up around the Depression 
was the audiences turned to the film industry for 
entertainment and escape. Maybe so...but going to the 
movies was discretionary spending...and sales dropped for 
the motion pictures just as they did for the auto industry. 
In 1931, movies brought in $831 million. By 1933, sales had 
fallen to $546 million.

Even on a VCR, the sunsets, fires and panoramas of "Gone 
With the Wind" are impressive. They are the work of one of 
the greatest success stories in Hollywood - the Technicolor 
Corporation. Formed in 1915, the company had a monopoly on 
supplying color to the film industry. After the spectacular 
success of 'Gone with the Wind' and the 'Wizard of Oz,' 
both made in 1939, movies began a conversion to color almost as 
rapid as the switch to talkies in 1927. Technicolor was the 
sole supplier of color to Hollywood until 1947. Still, 
against the current of falling stock prices on Wall Street, 
Technicolor could make no progress. The stock never 
recovered to its '20s high.

"In the end," comments Barrie Wigmore in his book, "The 
Crash and Its Aftermath," the movie industry thrived, the 
Warners and the Foxes retained control, but the investors 
went broke."

Fox Films hit a high of $106 in 1929. By 1933, you could 
buy it for 75 cents. RKO fell from $76 in '29 to 25 cents 
in 1932. Warner Brothers dropped from $67 to 50 cents.

The money investors put up - funding the development of 
some of the most successful new technologies for one of 
America's most profitable new industries - was lost. Like 
the Old South, it was gone with the wind.

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