*** Nortel dropped a bomb on Wall Street Friday. In
addition to the usual admission that sales and profits
would not be as great as investors had hoped, Nortel's CEO
told the street that the problem was likely to persist
through the 4th quarter of this year!
*** As far as I know, this was the first time a New Economy
company has recognized publicly that the current malaise
could be more than a very short-term slowdown.
*** Maybe the slump won't be V shaped after all. Maybe the
rising slopes on the other side of the recession valley are
farther away than they appear.
*** Nortel announced that it was laying off 10,000 people
and that earnings had been cut in half. Investors knocked
the stock down by a third.
*** Nortel was not alone. Most of the Big Techs seemed to
suffer on Friday as the Nasdaq fell 127 points. The damage
was most severe in the fiber optics area - where JDS
Uniphase lost 20% of its value.
*** "When you add up the big names mentioned you get more
than $100 billion in revenues," writes William Fleckenstein
"so ladies and gentlemen, this is significant stuff. These
are not itty-bitty companies that are having problems. This
will definitely back up the food chain in technology..."
(see: Second Half Rebound
*** The other thing that hurt stocks was the latest PPI
report, showing wholesale prices rising at 1.1% during the
month of January. This was the biggest increase in 10
years, and completely unexpected. Economists had projected
an increase of only 0.3%. Now, they're calling the January
number - which included big increases in natural gas costs
- a fluke.
*** Maybe. Maybe not. "Inflation is not dead," said Sung
Won Sohn, chief economist at Wells Fargo. On the other
hand, prices are probably not rising at 13% per year either
- as the January number might imply. To the extent that the
number reflects something real it is telling us not to
expect any improvement in corporate earnings any time soon.
The PPI measures the prices corporations pay for their
materials - energy, resources, and so forth. Corporations
are getting squeezed.
*** Uh oh...a young man in a business suit just barged past
my daughter Maria. What on earth?...
*** 20 minutes later...it turned out that he was from the
local tax office. They noticed that there was an antenna on
the roof, but that I had not paid the television tax. "Of
course, I didn't pay it," I told him, "I don't have a
*** We had gotten a number of bills - including one by
registered mail - but had thrown them away since we didn't
have a TV. Well, it turned out that a VCR player is
regarded as a television...so I ended up writing the guy a
check for 1,200 francs to get rid of him. Back to work...
*** That's the trouble with working from home...
interruptions. Through the window, I notice that Mr.
Deshais seems to be rooting out some lilac bushes (he hates
flowering plants for some reason)...I should stop him...but
you come first, dear reader...
*** So, Friday was not a great day for investors. The
Nasdaq ended the week down nearly 2%. Otherwise, there was
little to show for a week's worth of work on Wall Street.
*** In fact, there's little to show for the whole
millennium - stocks are about where they were on January
1st. And the Dow, as I pointed out on Friday, has made no
forward progress in nearly 2 years.
*** Two years ago, when Dow stocks were selling at record
prices, it was obvious they couldn't continue going up at
that pace forever. One might have predicted that the return
on such assets would have to be lower in the future than it
had been in the recent past. Otherwise the symmetry and
order that nature requires would be lost. The economy was
only adding wealth at a rate of about 5% per year. How
could stocks - which represent ownership of the means of
creating wealth - increase at three times that rate? Well,
they couldn't for very long.
*** Now, in order to get asset prices back in line with the
real economy, stocks have to fall by at least 50%...or
remain stagnant for another 10 years or so while the
economy catches up.
*** Alan Greenspan, however, sees it differently.
"Productivity has elevated earnings expectations and
created a permanently higher level of asset values," he
told the Senate last week. "We are only partway through one
of the most remarkable periods of technological advance
which is crucial to productivity growth...it is just a
matter of time before the malaise dissipates and the system
*** The system does come back...but only after the
inflationary liquidity caused by the central bank has been
*** Fannie Mae increased mortgage commitments by 35%,
December to January. Mortgage payments reached a record of
6.35% of disposable income in the 3rd quarter of last year.
But the taxpayer-backed (implicitly and eventually) lenders
continue to expand.
*** The real estate market is still hot, but consumer
sentiment is cooling. It dropped to its lowest level since
'93 last month, after falling for the 4th month in a row.
*** "One of my favorite 'big lies'," writes Lynn Carpenter,
"is the weird notion that a whole nation of Americans
acting as one complacent mob roared right through the
'20s... completely unaware that anything could go wrong.
The Great Crash wasn't a blind-side rout. A lot of smart,
sophisticated people managed to escape unscathed. But as I
compare the events of our day to that time, I can't help
but think: We could be in trouble."
*** "Everyone's looking at the stock market," Lynn
continues, "factory orders, inventories, earnings reports
and dozens of other statistics trying to see where we are
headed. But the truth is, people - families in particular -
are far more important than corporations or governments in
setting the nation's course. And, right now the balance
sheet of the individual isn't looking too good." (see: J.
Paul Getty, The Richest Man In
*** Gold rose $2.90 on Friday. The dollar, which almost
always goes in the opposite direction, fell. The euro rose
to nearly 92 cents.
*** Loews Cineplex 'went chapter.' Following a huge binge
in theatre investment, almost all the big chains are in
trouble. Too much capital, no matter where it is invested,
loses its value. "Money is like manure," someone once said,
"pile too much up in one place and it begins to stink."
*** Elizabeth and two of the older children went back to
Paris last night. They're packing up so that we can move to
another apartment. I have not seen it yet. All I know is
that it is a lot more expensive.
*** Today is a holiday in America. It is the day set aside
to remember people who are best forgotten - U.S. presidents
such as Rutherford B. Hayes and William J. Clinton.
*** But here in France, the crew of the Daily Reckoning
rarely takes a holiday and hardly sleeps...
The landing approach has begun. The flaps are down. A
moderate slowdown has hit the U.S. economy. Investors are
still optimistic. But the latest inflation numbers show the
highest 1-month increase in a decade...
Still...it 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
"You got a very good deal," said Maitre Boulzaguet. "You
bought at the very moment when prices hit bottom. Good
Maitre Boulzaguet is the 'notaire' who organized the deal
when we bought our farm in France. I saw him on Saturday
night at a dinner party organized by Blanquita, a woman
from Venezuela who is married to a local Frenchman.
"But you can't worry about prices," said the notaire. "You
never know if they're going up or down. You just have to
buy something you like. If you worry about money... well...
you are doomed to be miserable."
By way of further introduction to new readers, my family
and I moved to France a few years ago. Our intention was to
come for the summers, while I was trying to develop
business in Europe. But without ever really intending it,
we found ourselves making a much bigger investment - in
both time and money - in our French property. The house is
a huge chateau-style agglomeration from various epochs and
various owners - which was in desperate need of attention
when we arrived. We have been working on it, and spending
on it, for the last 4 years.
Maitre Boulzaguet is the kind of man you want to know when
you enter a new area. He knows everyone...and everyone's
business. If there is a local deal to be made, chances are
he is in on it.
"Cuba is great," he said suddenly, changing the subject. He
and his wife had just returned from a vacation. "But people
are so poor. I gave the woman who did our laundry a 50 cent
tip. But she gave it back. She said it was too much money."
Maitre and Madame Boulzaguet travel frequently. Their
children are grown. They take advantage of their free time
and excess money by touring the world.
"One of the best trips we ever took," he said, his eyes lit
up with the pleasure of recalling it, "was when we went to
the U.S. We rented a car in Phoenix and then drove all over
the Southwest. We went to Santa Fe and Taos. Taos Pueblo...
"But you know," he confided, his grey head bending in my
direction, "you never know. Sometimes the trips you think
are going to be the best turn out to be not so good...and
often, those that you take without much expectation turn
out to be your favorites."
So much of life is ruled by chance, dear reader, I feel it
my duty to call it to your attention. Thus, I pass along
this little memoire for no other purpose that showing you
how some people cope with uncertainty.
When you marry a woman of 25 you can scarcely predict what
she will look like at 50. When you get off the plane for a
vacation, you cannot be sure whether your time will be well
spent or not. And when you make an investment, you cannot
know at the time of purchase whether the asset price will
rise or fall.
Yet, you have to make choices. You have to decide to do one
thing and not another...to buy one investment and not
another... And, important decisions are almost impossible
to hedge. When you marry, for example, if you try to keep
your options open after you tie the knot you are almost
certain to wiggle the knot loose.
"You know what my wife and I do, though..." Maitre
Boulzaquet continued, "we decide in advance, before we
leave the house, that we're going to have a good time, no
matter what. And guess what, it works. We've been to some
rotten hotels.. Even in America, we stayed in... what are
they called... the Motel 5..."
"Motel 6," I corrected him, "where they leave the light on
"Well, I wished sometimes that they had turned the light
off. Some were pretty good, but some were not. But it
didn't matter because once we decided that it was something
we wanted to do and that, good or bad, we were going to
enjoy it. Well...we did."
The Boulzaguets had decided to make the best of their trips
- in sickness and in health...whether at the Four Seasons
or Motel 5...they were going to have a good time.
Could there be an equivalent in the investment world?
Also at the party was a older gentleman, with a youthful
face, but hair the color of snow and a pronounced forward
stoop. I did not catch his name, but he helped me
understand a little more of the French rural mentality.
"I think it is so nice what you have done with Ouzilly," he
said. "So often, when a grand old property passes out of a
family's hands, it goes downhill. It may have been in the
family for centuries, but the new owners don't really have
any attachment to it. Usually, it is on the market again in
a couple years - after they see how much work and expense
it is to keep it up. Then, it is flipped around, broken
up...and is never quite as nice as it used to be."
"But you seem to have stepped right into the previous
owners' shoes," he continued.
"Yes," literally, I thought, as someone left a pair of
slippers up in the attic, which I have used from time to
time, "they were broken by the weight of it. And now I am
being broken down by it too."
"Oh la la," added Maitre Boulzaguet, "I bet you wouldn't
want to add up all you've spent on the place."
"But it's a good thing you did," replied the white-haired
gentleman, "because it was on the edge of ruin."
"Yes," I couldn't help myself, "and now it is I who am on
the edge of ruin."
But we are all going to be ruined in one way or another. At
least here I can enjoy my poverty in genteel circumstances,
like the previous owners.
"But at least the land has gone up in value," Boulzaguet
At the time we bought the farm, property was at the bottom
of a cyclical low. At about $700 per acre, it was the
cheapest farmland in Europe...and about a tenth price of
land in Maryland.
It was also about a tenth the price of farmland in England
or Holland which attracted a number of foreign farmers
willing to master the complex farm subsidy system.
Whether it was the marginal buying by farmers, or an upturn
in the French economy, I don't know. But between 1995 and
2001 prices of French farmland have doubled.
Of course, it doesn't matter. We've decided to enjoy the
place. For better or for worse.
Starting in 1994, $1,000 invested in every one of these
modest recommendations - far away from the "must own"
stocks of Wall Street - could have returned you $794,815.
After the first few winners, you could have been investing
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Bill Bonner is,
in spite of himself, a natural born contrarian. Early each morning, Bill
writes The Daily
Reckoninghis take on the financial markets and whats going
on in the worldand 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 upnot 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 90sopening offices in Florida, London, Paris, Ireland, and
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