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Contributed by Bill Bonner
Publisher of: The Fleet Street Letter

PARIS, FRANCE 
THURSDAY, 22 FEBRUARY 2001 

 

Today:  The Internet Depression, Part lll

*** Dow Dips Downward Dramatically...

*** Will Dollars Get Dumped? Alan Greenspan's worst 
nightmare...

*** Going nowhere...Bezos sells shares...Americans living 
'from paycheck to paycheck'...and more...

*** What happened to Mr. Bear, I asked last week? 

*** Our furry friend returned to Wall Street to maul the big 
techs and a few other favorites. Cisco, for example, 
dropped down to $25. Sun sank below the $20 horizon. And 
EMC, long considered safe, lost $6.32.

*** The Dow fell 206 points - bringing the index down 3% in 
the first three days of the week. 1073 stocks advanced on 
the NYSE; 2024 declined.

*** The Nasdaq 100 has suffered even greater damage this 
week - falling 7%. And the Internets, as measured by 
TheSreet.com, have dropped 8%.

*** Gold stocks have gone nowhere. But nowhere is at least 
the right direction when everything else is going down.

*** For all the sound and fury, stock market investors have 
little to show for the last two years. Neither the Dow nor 
the Nasdaq have made the slightest progress. 

*** IBM lost 4% yesterday, Walmart got discounted 6%, and 
investors decided to do it themselves with Home Depot - 
knocking 7% off the price.

*** Home Deport is adding 22.5 million sq. ft. of retail 
space this year, according to a Merrill Lynch report. "Even 
after the stock market starts its descent," predicted 
Michael Mandel in his book, "The Coming Internet 
Depression, "there will be a substantial lag before it hits 
the economy. ... The loss of stock market wealth may also 
take quite a while to pull down consumer spending...."

*** The stock market action was blamed on an unexpectedly 
bad CPI number - 0.6% increase in consumer prices for the 
month of January, rather than the anticipated 0.3%.

*** Like the PPI number last week, this could be a fluke. 
But for the moment, both CPI and PPI are singing the same 
song, which goes something like the 1920s classic: "I'm 
forever blowing [up] bubbles..."

*** "Now that you're seeing inflation in both the CPI and 
PPI...how long will it be before foreigners start to bail 
on the dollar," asks Dan Denning. "The Fed keeps cutting 
rates to prop up the markets. But what does that do? Just 
makes more dollars...and each new dollar makes all the 
others worth less. So, lower interest rates discourage 
ownership of U.S. treasuries, lower stock prices discourage 
foreign ownership of U.S. stocks, and higher inflation 
gives everyone an incentive to get rid of their dollars 
that much more quickly."

*** On the heels of the CPI number, the Commerce department 
also announced America's trade imbalance rose to a record 
high of $369.7 billion last year ... up nearly 40% from 
1999. "America suffered the biggest shortfall with China," 
reports AP, "a record imbalance of $83.8 billion, 22 
percent higher than in 1999. The deficit with Japan, which 
for decades has been the front-runner, also set a record at 
$81.3 billion, an increase of 10.8 percent over the 1999 
imbalance." 

"Look at these trade debt numbers," Denning continues, 
"...if foreigners decide they'd rather own euros than 
dollars...look out below."

*** Yes, look out below, dear reader, the CPI number is 
just about Alan Greenspan's worst nightmare. As long as 
inflation number remains low, he and his merry band of 
currency destroyers at the Fed think they can lower 
interest rates at will, in order to get the economy moving. 
Now they have to worry that lower rates, at a time of 
rising CPI numbers, will cause people to dump dollars.

*** Bill Fleckenstein: "It's interesting that all of a sudden 
these numbers have gotten worse now that new folks are in 
charge of the Bureau of Labor Statistics (BLS). I'm sure 
that's just a coincidence though." (see: News Sellers 
Outsell Rumor Buyers)

*** How will Americans make it through a financial crisis? 
Not very well. AP reports that the median net financial 
assets for U.S. households is just $9,850. "The 'typical' 
U.S. household has net financial assets, including 
retirement savings, of less than $10,000," said the report, 
"and many families lost wealth in the late 1990s as 
consumer debt increased." Fifty-three percent of households 
surveyed by the Consumer Federation said they lived 
"paycheck to paycheck."

*** John Myers, our man on the scene in Calgary notes: "The 
buzz among oilmen in North America is that the Middle East 
is a powder keg; there could be a supply crunch that will 
lead G7 nations to begin a new round of developing domestic 
energy sources. How does this translate to profits? More 
money will flow into the development of oil and gas in the 
relatively virgin pools of Alberta and Saskatchewan."

*** "Before leaving office, Clinton did more than just 
secure pardons for everyone on his and Hillary's Christmas 
card list," Myers also writes, keeping an eye on the 
'crisis' in the West. "He issued an order that seemed more 
in keeping with the old Kremlin than the White House: 
natural gas and electricity suppliers must continue to ship 
to California regardless of whether their utility customers 
can pay. Clinton's Energy Secretary, Bill Richardson, 
placed the order, citing it in the interest of 'national 
defense.' National defense! Who are they kidding? Bush' man 
Hebert extended the order" (see: Depression Era Big Government 
in Force in California)

*** Amazon, our favorite 'River of No Returns' stock has 
now fallen 88% from its peak 14 months ago. But Bezos says 
"the company has never been in better shape." Analyst Ravi 
Suria figures that Amazon will spend $130 million on debt 
service this year, $120 million on capital expenses, and 
$50 million on restructuring. In addition, it will lose 
$140 million on operations. Taken together, these expenses 
add up to $50 million more than the company has available. 

*** Bezos sold $55 million of his own shares in the last 
few months. 

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THE INTERNET DEPRESSION, Part III

"Almost everything that's supposed to be 'new' about the 
New Economy has happened before."

Robert Samuelson



Yesterday marked the anniversary of one of the biggest, 
most costly, and most pointless battles of human history. 
The siege of Verdun was begun in February, 1916, and lasted 
until the following December. When it was over 300,000 men 
had died...but to no apparent purpose. Neither side had 
gained an advantage.

People make mistakes. Then they gradually learn and stop 
making them. Then, they make them again...or new ones.

WWI is commonly blamed on big abstract ideas - 
nationalization, militarization, mechanization. We learn 
the words in history class, but they give us little clue 
about why people would engage in such suicidal absurdities. 

The Great Depression, too, has been blamed on bad ideas. 
"Official dependence on outdated cliches - such as 
maintaining the gold standard..." was how one financial 
historian put it. 

"The Great Depression," explains Michael Mandel, "was 
marked by a rolling deflation, in which country after 
country jacked up interest rates in order to staunch the 
outflow of its gold. In each country the central bankers 
thought they were doing the right thing. And perhaps 
individually, they were. But collectively, they brought on 
a collapse in the global economy."

Yesterday's CPI reminds us that today's central bankers 
have plenty of opportunity to make mistakes too. The bond 
vigilantes may be taking a siesta, but there are plenty of 
investors and money managers all over the world who are wide 
awake. Inflation and falling Fed funds rates may signal to 
them that it is time to take their money elsewhere.

"Most of the wealth effect," Mandel wrote last year, "and 
the shopping spree that goes along with it, is due 
primarily to the soaring price of technology stocks. 

"From the second quarter of 1999 to the second quarter of 
2000," he writes, "the tech sector, including the telephone 
companies, was responsible for all the increase in market 
value of the S&P 500. That's despite the fall of the 
Internet stocks in early 2000. 

"Looking back a bit farther, between the middle of 1995 and 
the middle of 2000, about 45% of the rise in the market 
value of the S&P 500 came from the tech sector. Just four 
companies - Intel, Microsoft, Cisco, and America Online - 
were responsible for more than a $1 trillion increase in 
the market value over that five-year period."

In the last 2 years of that boom, at least 20% of the rise 
in market valuations was thanks to investment from 
overseas. 

We are now witnessing a correction of the boom in big tech. 
Since Mandel wrote, more than a trillion dollars has been 
taken out of tech valuations. 

"The closest historical precedent," he elaborates, "is the 
behavior of auto sales and stocks in the months before the 
crash of '29. The automobile industry of the 1920s was the 
equivalent of today's high-tech sector..."

Auto stocks peaked in March of '29 and fell 15% by 
September. "Investors reacted to the drop in auto stocks by 
shifting into other stocks," Mandel tells us, "what [they] 
did not realize, however, was that the fallout in auto 
sales and auto stocks was a sign that the leading sector of 
the economy, the one that had driven growth, was 
faltering..."

Mandel thinks he sees something new about the New Economy. 
Funding for technological innovation has moved from private 
tinkers, university labs and corporate R&D budgets to the 
capital markets. Since the IPO of Netscape in 1995, he 
says, it has been a New Era. Wall Street has vastly 
increased the availability of capital to new technology. 
Innovation has been securitized. 

This might be a good thing. It promises to greatly increase 
the rate of innovation, which Mandel believes also 
increases the rate of economic growth. But it comes at a 
price...technological improvements, upon which economic 
growth depends, are now subject to the boom/bust cycles of 
the markets themselves.

And just as the upswing of the new tech cycle takes the 
economy further and lasts longer than the cycles of the 
industrial age, so might the downswings, Mandel argues.

Even without the gold standard, central bankers can find 
themselves in similar trap. Mandel explains: "The Fed may 
face a no-win choice if the economy heads into a tech 
downcycle. Cutting interest rates to boost the economy 
makes the dollar less attractive to foreign investors, and 
only accelerates the outflow of money."

Economists John Eatwell and Lance Taylor, authors of "Global 
Finance at Risk," add: 

"the potential disequilibria - portfolio shifts away from 
the U.S., bigger international obligations on its debt, and 
growing financial stress on the household sector - could 
begin to feed on one another and on the views of the 
markets. At that point...all hopes for global macro 
stability could disappear."

Mandel is a Christopher Columbus of an economist. He has 
run aground on something big...but he doesn't know what it 
is. His maps show little of the new world into whose waters 
he has drifted. 

So here, dear reader, I will try to fill in the missing 
geography...

More tomorrow.

Your Magellan of the markets...

Bill Bonner

For investment ideas and insights consistent with those you read
in the Daily Reckoning please visit: http://www.dailyreckoning.com

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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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