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Contributed by Bill Bonner
Publisher of: The Fleet Street Letter

BALTIMORE, MARYLAND 
MONDAY, 29 JANUARY 2001 

 

Today:  Survival

*** Not much change on Wall Street last week...investors 
await the next FOMC meeting...

*** What if they don't cut rates again? "A disaster..."

*** A/D recovery...debt build-up...GATA gotcha...and more!

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*** I arrived back in Baltimore late last night. The 
streets were full of whooping, cheering crowds. When we 
stopped at a light, a group of friendly drunks came over 
and started pounding on the roof of the cab - looking for 
hands to slap. I didn't realize I had become such a 
celebrity.

*** "Where've you been?" asked the cab driver, looking at 
me through the rearview mirror as if he suspected I was a 
creature from space posing as a human being, "The Ravens 
just won the Super Bowl."

*** This news is confirmed by the headline of today's 
Baltimore Sun. Even the announcement of WWIII would be 
proclaimed in a smaller type. 

*** Baltimore's football team is named after the most well-
known poem of the town's most famous drunk - Edgar Allen 
Poe. In fact, it was on this very day that the poem, The 
Raven, was first published. It was an immediate hit in 
America, and in France - where Poe's poems were translated 
by Charles Baudelaire - it was an ever bigger hit.

*** But to return to the cabbie's question, where I've been 
is Latin America - where I spent the weekend...more about 
that below...

*** Friday produced little cause for excitement on Wall 
Street. Nothing much happened...just as nothing much 
happened during the week. 

*** The Dow fell 69 points on Friday. The Nasdaq rose 27 
points. That left both indexes unchanged for the week. In 
fact, so far, both the Dow and the S&P have barely moved.

*** GE fell another 3%.

*** The Nasdaq, of course, got a big boost on Jan. 3, after 
Alan Greenspan cut the Fed Funds rate by half a percent. 
That was enough to convince most investors that the Big 
Bottom in the Nasdaq had come and gone.

*** Investors expect more rate cuts from Greenspan & Co. - 
including one of another 50 basis points this week. They 
are sure that these rate cuts have already set stocks back 
on an upward course...and that the Big Bottom in the 
economy is only a few months in the future. In their minds, 
there is no reason to worry about bad economic news or bad 
earnings - because it is just a matter of time until the 
rate cuts work their magic.

*** "No rate cut [this week] will be a disaster for the 
market," said one analyst quoted by Reuters. Greenspan does 
not like market disasters and will probably provide the 
desired fix. More cuts are all it will take, in the bulls' 
view. "We'll be off to the races in the 2nd half," predicted 
the same analyst. Rukeyser's elves are now 9-1 bullish.

*** But there is an alternative view, held by a few cranks, 
curmudgeons and topographers. It holds that mountain ranges 
are usually about as high on one side as the other...and 
that sooner or later...in whatever direction you go, you 
reach sea level.

*** The present plateau is, in this latter view, likely to 
end in a steep drop...

*** So far, the Nasdaq has recovered 22% of its bear market 
decline. The S&P has bounced 38%. These numbers are on the 
low side of typical bear market rallies.

*** The Advance/Decline ratio turned negative on Friday, 
after a long positive spell. The A/D ratio topped out 
nearly two years ago - in April '98. Since then it fell 
from a plus 13 to a negative 8. It is now minus 
4.26...meaning that it, too, has recovered only 18.37% of 
its bear market losses.

*** Between 1991 and 2001, the Prudent Bear reminds us, the 
U.S. nearly doubled its total credit market debt, from $14 
trillion to $27 trillion. This excess credit, the true 
source of the Nasdaq bubble and the trade deficit, will 
have to be corrected somehow. And it will take a lot more 
bankruptcies and falling prices to do so.

*** "From 1997 to 2000," reports Justin Ford, originator of 
the Seeds of Wealth program, "U.S. households increased 
their borrowing by 51%...but only increased their income by 
17%. In that same time, total household assets grew by 47%, 
but liabilities grew even faster...by 54%. The 'negative' 
U.S. savings rate - the first since the Great Depression - 
is no mystery. U.S. consumers are loading up on 'bad' debt 
and spending far more than they earn. And if current trends 
continue, it's only going to get worse: Consumer debt is 
growing at a double-digit rate - versus a 4.8% rise for 
income."

*** "There are enough eerie similarities between America 
today and Japan in 1989-90 to be worrying," says The 
Economist. "The biggest is excessive debt...By borrowing 
against paper gains in share values, households have been 
able to shop until they dropped, not bothering to save."

"At the market's peak," continues The Economist, "American 
households owned shares worth 175% of their disposable 
income, much higher than Japanese households' shareholdings 
at the Tokyo market's 1989 peak of only 90% of their 
income. Just as Japan's crash led Japanese consumers to 
raise their savings and cut spending, so the risk is that 
the same could occur in America."

*** Gold fell nearly $2 on Friday. "The first shot in the 
battle to wrest gold from grips of central banks and a few 
powerful investment houses has been fired," Harry Schultz 
tells me. Harry, godfather to the financial newsletter 
business, has been following the "conspiracy to suppress 
the gold price" for some time. Now, he believes, members of 
a small non-profit organization known as Gold Anti-Trust 
Action may have found "the smoking gun." Could this be the 
beginning of the end for price fixing in the gold market? 
Do we care? (see: The Smoking Gun: Restoring the Free 
Market in Gold)

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SURVIVAL

The trouble with paradise is that it is too appealing. And 
too relaxing.

That is an observation based on my experience with nature 
this weekend...and my experience with the investment 
markets over the last few years. 

Mother Nature encourages, and then punishes, complacency. 

I set out from the new clubhouse before 6 a.m. My goal was 
to explore the southern coast of Rancho Santana - a 1,600-
acre parcel located along the Pacific. 

But long walks are also a good time for cogitation, and I 
had set aside a substantial subject. Along with a group of 
investors, I bought the ranch several years ago. Now I was 
considering investing something more important - time. 
Unlike money, when you invest time, the principal is never 
returned. 

None of us had ever seen the southernmost part of the 
property. It is separated from the rest of the ranch by 
high cliffs along the shore - so you cannot follow the 
water's edge to explore it - and protected from easy access 
by thick brush on the land side too. 

But on the previous day's outing I noticed that a path had 
been worn through the brush by the 200 head of cattle that 
roam the hills, and I was determined to follow it in the 
morning.

So, I was up before 5:30 - and set out.

The sun was not yet up, but there was already a dusting of 
pink on the eastern, featheredge of the few clouds above. 
Taking the high road, I was soon at the top of the hill, 
where I turned to look back over the new clubhouse and the 
5 miles of beach to the north. It was a beautiful 
scene...made even more beautiful by the fact that I was the 
only one to see it. It was all mine, for that moment.

I passed a couple of the houses that have been built in the 
last couple of years - white stucco with barrel tile and 
palm roofs. Also there is a temporary shack of rough wood 
and tin - where the workers sling their hammocks during the 
week. There were no signs of life anywhere. Just the sound 
of the waves hitting the beach...and the wind.

After about 20 minutes I reached the end of the road and 
took a path down to Escondido beach. It is a beach about 
500 yards long in an open crescent shape, surrounded by a 
steep escarpment.

I walked over to a clump of trees with whitish trunks and 
stripped off my clothes. You will forgive me, I hope, dear 
reader, for passing along such an intimate detail...but it 
alone will make sense of the cheer that arose from the 
fishing boat a few minutes later.

There was no sign of life either on the shore or on the 
ocean when I entered the water. The waves swelled up onto 
the beach like the gentle breathing of an NFL lineman 
asleep in a bathtub. 

The water was delightfully cool. You might think the sea 
would be tepid at this latitude. But the Humboldt Current, 
which runs down the coast, seems to keep it fresh. 

The beach fell off sharply, so I was able to swim parallel 
to the shore and only a few yards from it. I marveled at 
how calm the water was...and how idyllic the whole scene 
appeared...swimming in the Pacific au naturel, at our 
private, hidden beach.

Thus preoccupied with my thoughts and studying the cliffs 
onshore, suddenly the water level dropped. It was as if the 
footballer had risen from the tub. A strong current swept 
me away from the shore. I turned my head just in time to 
see a huge mountain of seawater, capped with a curling 
white foam, headed straight towards me. In less than a 
second it washed over me...and sent me crashing onto the 
beach. 

In another moment I was flushed up and began to recover my 
bearings. But the relative calm lasted for only a 
second...soon the sea dropped again and swept me even more 
violently away from the shore. This time, I suspected what 
was next. 

Trouble rarely visits alone. In another moment, a second 
peak of water struck...and again, I was tossed against the 
beach and hammered against the sand...and then swept back 
toward the sea. 

For a moment, I was afraid I might end up like the prime 
minister of Australia, who went in for a swim one day and 
never came back. But then, just as suddenly, the ocean was 
tranquil again. 

Taking advantage of this lull in the punishment, I made my 
retreat from the waves, not noticing the little fishing 
boat that had pulled into the little cove. 

It must have been the sight of the white, stark-naked 
gringo staggering up on the beach that drew loud, cackling 
huzzahs from the fishermen.... 

Nature is full of surprises.

After I got my clothes back on...and recovered my 
breath...I felt curiously invigorated. My destination 
remained the south end of the property, which could not be 
reached from the beach. I would either have to return up 
the path from which I came and then make my way around the 
back of the hill to the top of the cliffs - or climb up the 
escarpment directly.

I chose the latter path...or lack of one...partly because 
it would be much faster, but mostly because I wanted to see 
if I could do it. It was the riskier investment of 
time...but the payoff would be higher.

The sides were very steep, but the climb looked manageable. 
At least, from the bottom. It must have been at least 300 
feet from the bottom of the escarpment to its top. But when 
you take it step by step, it is amazing how quickly you can 
get into real trouble. 

I grabbed clumps of grass, dug my boots into the dirt and 
scrambled up the first few hundred feet. Then I arrived at 
the rock face - which was another 100 or so feet straight 
up. But it looked as though there were enough nooks and 
crannies to climb up. And my progress for the first few 
yards was encouraging - like the initial return on an IPO 
that is about to crash.

Thoughts of a crash came to mind as I reached the middle of 
the rock face. I had begun to feel like Tom Cruise in the 
opening scenes of the pathetic movie, Mission Impossible 2. 
Without intending to do so, little by little, I had gotten 
myself in a dangerously untenable situation - as though I 
were dollar- cost averaging myself into a preposterously 
overpriced speculation. 

I was only about 50 feet from the crest of the cliff. The 
wall of rock was straight up and down with fewer and fewer 
footholds. Any slip would be fatal at this point. Worse, I 
realized that the rock itself, upon which this installment 
and future issues of the Daily Reckoning depended, was 
defective. I had grabbed a miniature promontory above me in 
order to pull myself up to the next foothold. But as I put 
weight on it, the rock broke off. I was barely able to 
dodge the rock and grab another, less-appealing projection. 

Isn't that just like Mother Nature - with her droll wit - 
to put crumbling dry fudge at the very point where a 
climber desperately needs rocks with integrity! I noticed 
that my foothold, too, was loose and in danger of breaking 
away. If it did, I would be finished, for I had nothing 
really to hang onto...and nothing to stop my fall except 
the rocks and a few scraggly trees hundreds of feet below. 

"Don't panic," I told myself. And yet, panic seemed the 
only appropriate emotion. Anything else would be as lame 
and dishonest as a zoning board. 

But this was no time for high principle. This was a time 
for action. I was already high enough and could go no 
higher. There was nothing left to grab. But I couldn't 
figure out how to get down, either. The buyers had 
disappeared from the market...and there seemed to be no 
chance of a soft landing. 

I appeared to be stuck in a fatal position, with my 
foothold slowly crumbling and nothing to replace it. There 
was nothing to get a purchase on.

Obviously, since you are receiving this message, dear 
reader, this story must have a satisfactory, if not happy, 
ending. I will not try to draw it out any further or leave 
you in suspense. 

Growing out of the crevices of the rock were two small 
trees, just below me to the right. I had avoided them on 
the way up. One had thorns so long and lethal you'd be 
arrested if you tried to take them on an airplane. The 
other was covered with ants. If I leaned over carefully, 
stretched out and fell towards them, I might be able to 
reach them. 

In the event, I managed to grab the one with ants on 
it...swing down and then bump and scratch my way to firmer 
stone. Another 15 minutes of this, including beating ants 
out of my shirt, and I was back on the beach. My climb had 
been fully and completely corrected.

Nevermore...dear reader...Nevermore!

Until tomorrow...

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

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