Plus All Kinds of Raw Advice That's Certain to Impact Your
Wealth Today and Into the Future...
You'll Learn Timely Information on "Defending" Your Wealth
from three of the world's most noted wealth defense
strategists. For example, you'll hear David Melnik, Q.C.
Wealth Protection Specialist reveal:
*Why you should avoid any scheme promising that you "never
pay taxes again".
*The only true and legal way left to avoid certain taxes.
*In plain and simple language - what investing offshore
gives you...and what it doesn't give you.
*** The dead presidents were honored yesterday with a
holiday on Wall Street. So, things are pretty much as we
left them on Friday. Wholesale prices are increasing at 13%
per year - annualized from the latest month's data. And
tech companies are announcing that they either have no idea
what the last part of the year will bring (Dell) or don't
like what they see (Nortel).
*** This week should be interesting too. The giant
retailers - Nordstrom, J.C.Penny, Liz Claiborne, to name a
few - will post their results. And on Wednesday, the
Consumer Price Index for January will be revealed.
*** The trouble with recession is that people get laid off,
lose income, and don't buy as much stuff. Then, the people
who sell stuff notice that their earnings are falling and
they stop investing in the machines and people that make
the stuff. The supply of stuff goes down until consumers
begin to notice that they need stuff again.
*** What I have just described is, of course, the business
cycle - which was declared dead in 1998...but is suddenly
looking rather un-dead. Like it or not, the U.S. economy is
now cursed with this ghoulish specter.
*** It is commonly believed that the beast can be put off,
simply by waving a dollar bill in front of its face. Like
making the sign of the cross in front of a werewolf, the
dollar sign is supposed to cause a recession to shrink back
into the shadows.
*** On this trick does Mr. Greenspan, the most celebrated
recession-slayer of all time, rest his faith and his
policy. Will it work? Not forever, certainly, but maybe one
more time, allowing the Fed to puff up the bubble to an
even greater extreme. That is what makes this all so
interesting, don't you think? When the bubble finally
blows, now or later, the demons of economic hell will be
loosed upon the world.
*** Asked if capitalism can exist without crisis, Paul
O'Neill, U.S. secretary of the treasury, responded, "why
not?" Well, that's what we try to chronicle for you, dear
reader, in these daily reckonings. It can't exist without
crisis, because crisis is what you inevitably get when
people get carried away with one idea or another.
*** But O'Neill seems to believe in the perfectibility of
capitalism. He said he thought the Great Depression was the
result of bad policies - monetary, trade and fiscal. "We
did everything wrong," he said.
*** Will we do everything right this time? I don't think
so, dear reader, I don't think so. Capitalism is inherently
unstable. It is a system of booms and busts. Government
policy cannot stop the boom/bust cycle...it can only make
*** O'Neill says he thinks the economy is growing at
between plus 0.5% and minus 0.5%.
*** "The American middle class is full of families that
could not write a check for the rent, utilities, insurance
and car payment at the same time," writes Lynn Carpenter.
Lynn's convinced that the true barometer of the economy
comes not from the major indexes, or the Fed funds rate,
but from the balance sheet of the average family.
*** "Families need to put a new television on their credit
card..." Lynn points out. "Yet, since 1974, rent and
utilities have fallen from 23% of an average family's
spending to 17%-in real terms, after inflation. Food has
gone from 19% of the budget to under 14%. What's going on
here? For one thing, that 26% reduction in housing costs is
offset by a 600% increase in the portion of the budget
spent on recreation! Families are also tripling the amount
they devote to apparel and shoes, and doubling what they
spend on transportation..." (see: J. Paul
Richest Man in Babylon...).
*** A number of class action suits against Nortel have been
set in motion. Plaintiffs charge that the company misled
investors...and note that company executives sold $7
million of Nortel shares within 3 weeks of the profit
warning announcement. Nortel, once at C124.50 is now around
C30. The shares rose C2.25 yesterday in Toronto.
*** The 9 major tobacco companies are up an average of 90%
so far this year. But, uh oh, analysts have turned bullish
on tobacco. Philip Morris, which we suggested to you a year
ago, now trades at $47.
*** A friend sent me a remarkable exhibit from the
'practice random acts of kindness' school of marketing. "We
can't make your tuna salad just the way you like it," says
the letter. But Amazon.com can send customers 10 1-cent
stamps to help them adjust to the postal rate increase in
January, which is what it did. In big ways in and small
ones, Amazon continues to redistribute shareholder's money
to customers. "Short Amazon" says the accompanying message
from my friend. (also see: Still A Great Short)
*** "Everything is out of phase," said our gardener, Mr.
Deshais, this morning. A week ago, we were outdoors in our
shirtsleeves telling each other that winter was over.
Today, I am sitting so close to the fire I can smell my
sweater burning - and looking out the window at the plum
trees already in bloom. It has turned very cold. Snow has
been forecast for later in the week.
*** "I'm going to kill the goose," Mr. Deshais added.
"Why," I asked naively, "what did it do?"
"No, no, Monsieur Bonner," said the ever-practical
gardener, "we now have room in the freezer, so there's no
reason to continue feeding it."
Later, I went out to the woodshed to see what he was up to.
The goose was strung up by his feet. The white feathers of
its neck had turned red...and were dripping. Not quite
dead. I wondered what it must have thought. The poor thing
watched Mr. Deshais's little dog, Tina, drink the pooled
blood on the ground. Mother nature is no sentimentalist.
*** "Live Large," urges a headline at Forbes.com. I
imagined the scene...a fat person, finally liberated from
the restraint of embarrassment, rises triumphantly at a
meeting and tells his fellow weight watchers: "Stuff it!
I've had it with starving myself. I'm going to Live Large!"
But no, the Forbes message - which might be better phrased,
"Live Grandly," offers readers a chance to win 3 nights at
the Forbes chateau, which I believe is in the Loire Valley
not too far from here.
*** Not to be outdone, I will offer DR readers a similar
contest. First-place winners will get 3 nights free in my
chateau d'Ouzilly. Losers will get 4 nights. Details to
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Paul O'Neill notes that the Great Depression resulted from
doing all the wrong things. This is the view made popular
by Milton Friedman.
As historian Sean Cashman described the situation in the
late '20s and early '30s:
"The people running the economic machinery simply did not
fully understand the system they were operating. Official
dependence on outdated cliches - such as maintaining the
gold standard, balancing the budget, and opposing inflation
- all posed insuperable barriers to an early solution to
"But after a while," as Friedman observed, people "stop
making the same mistakes." What he forgot to say is that
they begin to make new ones.
An historian, looking back on the boom of the late 90s, to
which we have already borne witness, and its resolution in
the early 2000s, which we await, is likely to notice both
kinds of errors. That is, he will see the classic errors
made by investors and policy makers - ignoring the business
cycle....allowing themselves to get swept off their feet by
greed and hubris...and believing that they could get
something for nothing. Plus, he will see some entirely
new errors too - products of the unique set of
circumstances at the end of the 2nd millennium and the
beginning of the next.
"Every economic era is afflicted with its own unique
curse," announces the opening sentence of Michael Mandel's
book, "The Coming Internet Depression."
"Agricultural economies were tied to the rhythms of the
harvests," he continues. "Villages would prosper when crops
were good, and suffer, when drought or pests withered the
fields. A long enough drought could devastate a region or
even a civilization."
"Up until the business cycle of 1857, or perhaps 1866,"
Mandel quotes Charles Kindleberger, "the harvest was the
measure of business conditions. A bumper crop lowered the
price of bread...crop failure, on the other hand, led to
In the long period pre-dating the industrial revolution,
most of the economy of all nations was the farm economy.
There was not much more than that. A bad harvest was bad
news. But at least it was local bad news. People in the
affected area suffered a decline in their standards of
living. Economic slumps meant reduced rations. This
affected all agricultural economies - even those in the New
World. Skeletal remains of colonists in Maryland during the
1600s, for example, show that they suffered from periodic
If the economic crisis was particularly bad, and people had
not saved enough in coin or grain, they starved to death.
But the Industrial Revolution changed things. It virtually
eliminated the threat of starvation, by vastly boosting
farm productivity...and by reducing the cost and time of
transporting food. It compressed space - so that people in
London could enjoy bananas from Latin America and people in
New York could eat lamb raised in New Zealand.
Mandel: "The gradual shift to an industrial economy
seemingly made growth more controllable and predictable. No
longer was prosperity tied to the harvest... The new source
of wealth was systematic investment in capital goods -
machinery, factories, railroads, electrical and telephone
systems - which could be used to multiply human
productivity. At the same time the rise of the modern stock
and bond markets in the second half of the 1800s provided
financing for large capital projects on a scale never
before dreamed of. The dawn of mass production permitted
industrial economies to achieve unprecedented growth rates
and living standards.
"It soon became clear, however, that industrial economies
were prone to new types of economic fluctuations. Worse,
these shocks were broader, more pervasive, and in many ways
more violent than any country had experienced before.
Starting in the middle of the 19th century, national and
global capital markets opened up the door, for the first
time, to national and global economic crises - the boom-
and-bust cycles in business investment and labor markets
that we now recognize as the familiar business cycle."
After more than 200 years of observation, the business
cycle should come as no surprise. Yet, each generation of
investors and businessmen seems condemned to rediscover it
on its own...at least once, and often several times.
As recalled in these letters, the railroad industry of the
19th century saw several full turns of the boom/bust cycle.
Fortunes were invested in the belief that you couldn't
overspend on such a promising new technology - only to
discover that too much had been spent. Investors went broke
episodically, right up into the 20th century, as if each one
was the Adam, the Alpha Man, of the investment world. "The
total investment in American railroads came to roughly $10
billion in 1890," Mandel tells us, "an enormous sum at a
time when the entire annual output of the economy was on
the order of $13 billion."
As further recalled in these letters, the auto industry
repeated the experience of the railroads - again, as if no
one had ever before invested in a new transportation boom.
Into this new investment Eden, billions of dollars were
devoted to competing for the automobile 'space.' Five
hundred separate companies were created.
But the business cycle still operated, in the 20th century
as in the 19th. What went up so magnificently, fell with
"The depths of the collapse," Mandel writes, "were
staggering. In the twelve months prior to October 1929,
America's automobile factories produced over 4.7 million
cars. In the year after the crash, automobile factories
production fell by 40%, as consumers simply stopped buying.
By 1932, production had fallen to only 1.12 million cars,
75% BELOW ITS PEAK. Over the stretch from 1929 to 1932, the
number of automobile production workers fell by 45%, a
decline that traumatized whole states. And that drop
underestimates the economic impact: auto company payroll
expenses actually dropped by 65%."
More recently, the classic error and cause of the business
cycle has been repeated in the go-go industry of our time:
Information Technology. Fortunes have been spent on
computers, the Internet, and telecommunications. So much
excess capacity has been created that it will take years to
work it off.
Mandel cites the example of Toys R Us, which in 1999 felt
compelled to spend $86 million to set up a website in order
to meet the challenge posed by eToys. EToys went public in
May of '99. The stock rose 200% in the first day of
trading. It looked as though the toys online space was
going to be worth billions. Toys R Us couldn't let eToys
get it all.
But a year later, online toy sales didn't look so good. In
fact, it appeared that eToys had spent too much on too
small a market. The shares, which had traded at $76 on the
first day of trading, closed on Friday at 15 cents. The
company has gone bust.
"Like most failed e-tailers," reports Forbes, "eToys
overspent, building out infrastructure and floating an
expensive marketing campaign in anticipation of a market
that didn't materialize fast enough to support the
Among other evidence of overbuilding, eToys is left with a
1.2 million-square-foot distribution center in Blairs, Va.,
which opened in August 2000. "They built a great
distribution center, but the volume you would have to do to
make the place profitable is astronomical," Forbes quotes
an analyst, "No one's e-commerce activities could even come
Of course, these are merely the classic, traditional errors
of the business cycle. In the present case, they have been
permitted to go to greater excess than usual, thanks to the
credit industry and the Fed...but the mistakes are the same
as those made by the financiers of the railroads or the
stock buyers of the '20s or the Japanese real estate
investors of the 1980s.
Tomorrow, we will look at what is really new about the New
Economy...and why it threatens an even more calamitous
The Daily Reckoning:
author Bill Bonner
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