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Contributed by Bill Bonner
Publisher of: The Fleet Street Letter

OUZILLY, FRANCE 
MONDAY, 19 FEBRUARY 2001 

 

Today:  The Accidental Investor

*** Nortel drops bomb...techs blow up...

*** "Inflation is not dead..."

*** Tax agents...bankrupt cinemas...and more...

*** 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 D.O.A.)

*** 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 
television."

*** 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 
comes back." 

*** The system does come back...but only after the 
inflationary liquidity caused by the central bank has been 
wrung out. 

*** 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 Babylon...)

*** 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...

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

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 
yourself for: 

The Coming Economic Crisis
* * * * * * * * * * * * * * * * * * * * * * * * * * * * *


THE ACCIDENTAL INVESTOR

"You got a very good deal," said Maitre Boulzaguet. "You 
bought at the very moment when prices hit bottom. Good 
move."

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...
c'est fantastique. 

"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 
for you."

"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 
reminded us.

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.

Bill Bonner




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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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