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Contributed by Bill Bonner
Publisher of: The Fleet Street Letter



Today:  Tough Love On St. Valentine's Day

*** Mr. Greenspan spoke...and Mr. Market was not 

*** Is Bezos still smiling? Consumers are not copying the 
Japanese, what's the problem?

*** Debt heads... getting poorer... Luke's gospel... and 
pagan love festivals...

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*** Well, the great man spoke. But none of the news sources 
on which I rely seem to have been able to figure out what 
he said.

*** Whatever it was, Mr. Market was not impressed. The Dow 
fell 43 points. The Nasdaq fell 61.

*** The Big Techs backed off. Lucent dropped 9% after its 
debt was close below $12. The biotechs, big 
winners on Monday, were big losers yesterday, falling 5%. 
The Internets were losers too - with index 
down 4%. Tobacco companies, on the other hand, rose 3%.

*** Amazon fell to $13.75. Is Bezos still smiling? I hope 
so. After all, you shouldn't take stock prices too 
seriously. Besides, Mr. Bezos was TIME's "Man of the Year" 
last year. You can't do much better than that.

*** Mr. Greenspan did his part, now consumers are doing 
theirs. Retail sales rose 0.7% in January - their fastest 
pace since September.

*** So...the battle to protect America from saving seems to 
be going well. Of course, Napoleon's attack against Russia 
went well too, in the early stages. So did Japan's attack 
on the U.S. fleet at Pearl Harbor.

*** "Debt Smothers America's Youth" proclaims USA Today. 
After what was billed as the biggest wealth explosion in 
history, America's young people are poorer, not richer, 
than previous generations. 

*** "Like no other generation," says the USA Today report, 
"today's 18- to 35-year-olds have grown up with a culture 
of debt - a product of easy credit, a booming economy and 
expensive lifestyles. They often live paycheck-to-paycheck, 
using credit cards and loans to finance restaurant meals, 
high-tech toys and new cars they couldn't otherwise 
afford... At a time when they could be setting aside money 
for a down payment on a home, many young people are 
mortgaging their financial future. Instead of getting a 
head start on saving for retirement, they are spending 
years digging themselves out of debt."

*** According to a Reuters report, a New Jersey man racked 
up almost half a million dollars in charges on more than 20 
cards over a one-year period. Ibrahim Elwahsh, 36, was a 
temporary worker with a $25,000 annual income... but he 
didn't let that limit his lifestyle. During a 1995-96, he 
went on a spending spree that totaled about $450,000 and 
declared bankruptcy in 1996. 

*** Among people under 35 years old, reports USA Today, 
home ownership has fallen from 41.2% in 1981 to 39.7% 
today. And the equity in their homes has fallen more 
sharply - from $57,000 in '89 to $49,200 in '99. Net worth 
has dropped too - from $12,700 in '95 to only $9,000 in 

*** Another sign of a phony boom - bankruptcies are 
soaring. SMR research says the number of people filing for 
bankruptcy could reach 1.5 million this year. And Salomon 
Smith Barney estimates that as much as $33 billion in U.S. 
corporate loans could go bad - up 40% from last year. 

*** Consumers are devoting 14.1% of after-tax income trying 
to keep up with their debt burdens according to Charles 
Peabody at Mitchell Securities. Diane Swonk at Bank One 
Corp. says the number could be as high as 34.1% - when you 
include home equity loans and auto leases.

*** "Aren't Americans richer than they used to be...and 
able to carry more debt?" asks US News & World Report. The 
problem, says USN&WR, is that "income and assets are highly 
concentrated while debt is distributed more 
democratically." Rich investors might have benefited from 
the run-up in asset valuations over the last 10 years. But 
those at the bottom half of the wealth spectrum have few 
financial assets. The wealthiest 1% of the population has a 
net worth 167 times greater than that of the middle 20%. 
But the rich have only 6 times the debt of those in the 

*** While people were supposed to be getting rich, many 
were cutting deeply into the few assets they had. Among all 
homeowners, equity declined from 70% a generation ago, 
according to USN&WR, to only 54% today. What's more, 
borrowing from pensions doubled between '92 and '98.

*** "The finances of the entire country are on the line," 
continues USN&WR. Corporations are deeply in hock along 
with consumers. Xerox owes $7 billion. JC Penny carries $6 
billion. And the nation itself runs a current account 
deficit equal to 4.5% of GDP. The only thing that keeps the 
country afloat is the willingness of foreign savers to buy 
U.S. debt and financial assets. Overseas investors own a 
third of the U.S. Treasury market...20% of all U.S. 
corporate debt...and 9% of all U.S. stocks.

*** "The real story of the 90s," says the Economic Policy 
Institute, "was not the stock market but the debt 

*** The euro fell a bit yesterday. For better or for worse, 
I'm betting that a lot of this debt will go bad...and the 
dollar will go bad with it. So, I put some money into a 
euro-denominated account at I see in a press 
release today that the bank has been awarded Forbes 
Magazine's "Best Of The Web" designation for 2001.

*** First, electricity... now this? "In the US, there are 
more than 54,000 municipal water systems serving an average 
of 4,000 customers each," writes John Myers of Outsanding 
Investments, "yet the water and wastewater treatment 
infrastructure is failing - a victim of antiquated systems. 
Many water utilities are using pre-WWI technology. The 
nation's wastewater treatment market alone is already worth 
$82 billion..." Myers believes there is some money to be 
made as the water 'crisis' gains momentum in the popular 
media. (see: Turning Water Into Wine)

*** While Henry squirmed and jived in church on Sunday, 
Pere Marchand recalled Luke's version of what is known as 
"the beatitudes." "Blessed are they that..." and so forth. 
Luke remembered Jesus to offer maledictions as well as 
blessings, with a symmetry that might apply to Jeff Bezos 
or the entire New Era boom: "Woe unto you that are rich! 
For ye have received your consolation...Woe unto you that 
laugh now, for ye shall mourn and weep...Woe unto you, when 
all men shall speak well of you!" 

*** According to my usually unreliable sources, on this day 
in 269 A.D. a young Roman named Valentine, who had 
converted to Christianity while in prison, was clubbed to 
death for his beliefs. The 14th of February - the day 
before the Roman feast of Lupercalia, a pagan love festival 
- was then set apart as the special day to remember Saint 
Valentine. In 496 A.D. Pope Gelasius changed Lupercalia 
from the 15th to the 14th to try and stop the pagan ritual. 
The church, however, finding little fault with a love 
celebration, did away with only the pagan elements. St. 
Valentine is now remembered as the patron saint of love. 

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Sometimes the hard slap of reality is better for people 
than a sweet cushion of accommodating affection. That may 
be as true for an economy seduced by credit as for a 
wayward husband.

What people most want at any given moment is not 
necessarily what is best for them in the long run. Drug 
addicts, for example, may want another fix. Obese people 
may want another eclair. Alcoholics may want another drink. 
And politicians may want another term in office. But in no 
case is the object of their desire best for them...or for 
the people around them.

Pardon me for bringing up the subject of "tough love" on 
St. Valentine's day, dear reader. It is not the kind of 
love either of us want. But it may be the kind of love the 
U.S. economy needs. 

"Recession," said one young person interviewed by USA 
Today, "will be good for my generation. Our expectations 
are so elevated..."

The expectations of most people in America - young or old - 
seem to have reached Olympian heights. Only the gods should 
have it so good. Full employment, rising stock prices...I 
will not dwell on those illusions. I have dwelled on them 
for so long in these messages that I might be accused of 
taking up permanent residence. 

But, to judge from the press as well as the opinion polls, 
doubts are beginning to surface. Yesterday, for example, 
the Wall Street Journal let the cat out of the bag with a 
remarkable admission: "Savings Generate Wealth," said a 
column of personal financial advice.

People have begun to notice that they are deeply in debt. 
They are hearing more and more of layoffs and bankruptcies. 
Their stocks lost money last year and are flat so far for 
this millennium. For the present they are willing to 
"look across the valley" of the current downturn to the 
rising slope of prosperity on the other side. the 
margin...they are beginning to wonder if it might be easier 
to make the hike with a lighter debt load. Like a drunken 
man about to take up rock climbing, they're beginning to 
think it might be safer if they sobered up first. 

And yet, if Americans begin to 'copy the Japanese' by 
saving money instead of spending it, the whole thing is 
over. Forget the soft landing. The economy would plunge so 
deep into the earth it would take years to dig out. 

Let us not forget, though, that Alan Greenspan is still at 
the controls. And he promises to fight the downdraft of 
financial rectitude with everything at his command. But 
since he cannot expand time, nor perform the miracle of the 
loaves and fishes, he can only do what he has always 
done...the very thing that fueled the enormous boom in the 
first place. That is, he proposes to give American 
consumers what they may need least in the entire world - 
more credit. 

The fate of the entire world economy is at stake. Yet, so 
sure are most people that this joy juice will do the trick, 
that the world doesn't even hold its breath.

People are sure it will work because, in recent memory, it 
has never failed. Each time the bum was about to sober up, 
Greenspan's Easy-Credit Corner Liquor Store offered more 
booze...and the party was on again.

But, [dare I say it?], this time might be different. 

"Don't count on Mr. Greenspan this time," writes Dr. Kurt 
Richebacher. "His monetary easing in late 1998 and his 
following extremely hesitant rate hikes have precipitated 
the worst credit excesses ever in history. ...and have made 
the U.S. economy and its financial system extremely 
vulnerable to any economic slowdown."

It is not like the 1997-98 crisis period, Dr. Richebacher 
elaborates. It is worse. "Total outstanding debt of the 
non-financial sector during the two-year period after June 
30 [1998] has risen $4,400 billion (20%). Corporate debt 
soared 30% to $4,600 billion, while private household debt 
increased 19% to $6,700 billion. This included a surge in 
outstanding mortgage debt by $1,600 billion or 32%. And 
more specific to financial system leverage, the financial 
sector raised its borrowing by a shocking $2,000 billion, 
or 43%, to almost $8,000 billion."

"We see very important differences between the financial 
crisis of '98 and that of today," he continues. 

" was panic and turmoil at the periphery of the 
global financial system that threatened the center.... This 
time...the developing financial crisis has its epicenter in 
the U.S. financial system itself."

Despite the upturn in January spending, says Dr. 
Richebacher, the consumer "is exposed to a savage financial 
squeeze, impacting him from three sides: first, abysmal 
growth of real disposable income; second, plunging 
financial wealth; and third, tightening credit conditions."
Spending rose steadily and steeply during the late 90s. 
Finally, it outstripped earnings, so that during the 6-
month period to November 2000, for example, consumers spent 
nearly $80 billion more than their incomes.

Caught now with capital losses rather than capital gains, 
high energy bills, and the threat of being laid-off from 
his job, the consumer has little choice. He has to go on 
the wagon.

This may not happen immediately. It may be difficult to see 
amid the white darkness of information age data. Dr. 
Richebacher notes that "it took more than a year after the 
crash in October-November 1929 for the public, at long 
last, to become frightened..." 

But woe unto to you who are complacent...for ye are 
destined to know fear.

Bill Bonner, howling in the wilderness of Poitou...
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