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Contributed by Bill Bonner
Publisher of: The Fleet Street Letter

PARIS, FRANCE 
MONDAY, 5 MARCH 2001 

 

Today:  Epizootic

*** US economy on borrowed money and borrowed time. And 
time is running out... $4.1 TRILLION lost so far...

*** A 'supply side' recession - for the first time in more 
than 50 years...

*** Fools and Knaves...Japan sinks...and trouble in the 
food chain...

*** Good grief! It's already March 5th...the Ides of March 
will be upon us soon. And then, spring. Yet another 
season...with warm rain stirring dull roots... 

*** There's never enough time. "It's a cosmic problem," 
Doug Casey advised me recently. "We have less and less of 
it every day." Yes, every day we become older than we'd 
like to be...but not as old as we hope to get. 

*** Time seems to be running out for the Great Bull Market 
and Credit Bubble of the Late 20th Century. Larry Ellison 
admitted that earnings at Oracle were likely to decline 20% 
in the 3rd quarter. Investors knocked the stock down 21% at 
the end of last week. Rival MSFT was discounted 5%.

*** Ellison must have seen bad news coming. He sold $1 
billion of his own stock back in January.

*** GE fell 3% on Friday.

*** The Dow ended Friday up 16 points. The Nasdaq ended 
down 65 points, bringing the market to a 58% loss from its 
high of last year. Internets - as measured by TheStreet.com 
- fell 8% last week. Telecoms listed on Nasdaq fell 6%.

*** Even after getting more than cut in half, MSFT's price 
still equals more than 30 times last year's earnings. The 
Dow has an average P/E over 20.

*** Guess how much money has been lost in stocks since last 
year at this time? Alan Abelson, in Barron's, puts the 
figure at $4.1 trillion, or about 40% of the entire GDP. 
Hmmm...that's about $40,000 per family. Can Americans 
afford to lose that much? I guess so...it was only paper 
wealth anyway.

*** The average tech fund is down 56%. 

*** Now that the bear market has moved into the 
'acceptance' stage, people are beginning to scout around 
and consider the alternatives. "US stock funds see record 
outflow," says a headline on CBS Market Watch. $13 billion 
left equity funds last month.

*** On the other hand, Mr. Bear can be counted upon to 
provide hopeful investors with reasons to think the worst 
is over. Many people will be tempted to buy stocks like 
MSFT and Intel at today's 'bargain' prices...expecting a 
new bull market to erase the losses of the last 12 months.

*** But "no bull market ever started with the Dow selling 
at 21 times earnings," writes Dow Theorist Richard Russell.

*** "The expectation of compounding earnings growth has run 
smack into the realities of the business cycle," says Kevin 
Klombies of Intermarket Relationships. "Excessive valuation 
levels [in techs] are not some evil plot designed by the 
rich to fleece the poor, but rather a signal that the 
markets have discovered an opportunity for growth and are 
willing to provide capital for free. The problem was... and 
is... that so much capital was funneled into this sector 
that the inevitable overbuilding was... inevitable. The sky 
high prices afforded to tech and telecom shares through the 
past number of years could never - and will never - be 
justified." 

*** After a fool and his money are parted, can a knave get 
it back for him? The Wall Street Journal reports that 
lawyers have filed suit against Merrill Lynch on behalf of 
a doctor who held onto his tech shares based on Henry 
Blodgett's "buy" recommendation. The case will go to 
arbitration. 

*** "Americans are living in a financial fantasy," said a 
spokesman for Northwestern Mutual, which sponsored a study 
of retirement financing. Those surveyed planned to retire 
at 61, the study found, but few had figured out how they 
were going to pay for it.

*** You may remember, Japan lowered its interest rates to 
0.25% last week. Did it set off a new bull market? Nope. 
Stocks fell to a near 16-year low. "Investors dismiss 
Japanese rate cut and dump techs," says an International 
Herald Tribune headline.

*** The Japanese slump - which began 11 years ago - has 
resisted all cures...both fiscal and monetary. And 
now..."what if the near-universal faith in the power of the 
central bank [in the U.S.] to stimulate demand proves 
misplaced?" asks the Financial Times. "What if there is 
something different about this turn-of-the-century economic 
cycle that may limit the ability of monetary policy to 
produce the desired response?"

*** The FT goes on to point out (as Dr. Richebacher has 
already) that not all downturns are alike. Typically, the 
post-war pattern has been for "overheating" to produce 
higher inflation rates, which the central bank then stifles 
with higher interest rates, which produce the downturn. But 
this time, there was little inflation. Why? Because it is a 
"supply side" recession...more like the recession in Japan 
of the last 11 years...or the one that followed the '29 
crash in America. It is marked by too much capacity, which 
helps keep prices down. 

*** For the first time in more than 50 years," says the FT, 
"the U.S. is experiencing a downturn against a background 
of suppressed inflation. And just as the Fed's role in 
producing this period of weakness was relatively limited... 
so it may also be not much more than a bit player in 
determining how quickly it ends." 

*** All the discussion, debate and whining about whether 
the Fed is going to raise or lower interest rates - upon 
which the entire nation turns its attention as if it were 
the Second Coming...and Alan Greenspan the Messiah - is 
probably nothing more than a sideshow. Higher rates didn't 
cause the collapse of the Nasdaq. Lower rates won't bring 
it back. 

*** Mr. Deshais needed a drink on Saturday. "They're 
closing the markets...We have to go out right away and buy 
our pigs...or we won't be able to." Three cases of possible 
hoof and mouth disease have been discovered in Europe. The 
farmers are in a panic. More below...

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EPIZOOTIC

We've been suffering through one of Mr. Deshais's periodic 
bouts of sobriety. 

Unfortunately, these episodes seem to be occurring more 
frequently and lasting longer.

"Mr. Bonner," he said to me on Saturday, as Benoit and I 
were working on the stone wall. "We have to do something 
right away. Haven't you heard about it? The entire food 
chain is in danger. They're closing the markets."

The gardener was referring to the outbreak of an epizootic 
that has panicked farmers throughout Britain... and now the 
continent. In Britain, entire herds of sheep and other 
cloven-footed animals are being slaughtered - their bodies 
doused with gasoline and set on fire.

Borders have been sealed to prevent the virus from 
infecting herds here in France...still, three cases 
suspected to be hoof and mouth disease have been reported 
in Europe - one in Denmark, one in Belgium and one here in 
France.

At the end of last week, French officials banned all live 
animal markets - such as the one at Les Herolles, nearby, 
where we were going to buy our pigs. We will have to find 
our animals elsewhere.

There is something comforting about being surrounded by 
live, edible animals. They represent a form of savings. 
Unlike dollars or euros, they are a store of value that can 
be - barring some unforeseen calamity - consumed as needed. 

As society advances, fewer and fewer people have savings in 
this form - or any other. Collectively, we rely on the 
market system to produce the items we need, from inventory, 
just in time. And we count on the value of our money to 
make the purchase.

Usually, things work as we expect. But not always. Human 
history - at least the entertaining part - is a record of 
things not quite working as expected...wars, natural 
disasters, plagues, revolutions, depressions, panics, mass 
slaughter. 

It is widely believed, dear reader, that we have reached an 
Age of Perfection, where these things no longer happen. And 
yet.... 

"We seem to have our collective foot slammed on the 
world's accelerator pedal," writes Mr. Thomas Homer-Dixon 
in the Financial Times (reprised by Marc Faber in his 
Gloom, Boom and Doom Report). 

"It is time to think creatively about how we can slow 
things down, how we can ease up a bit on that accelerator 
pedal," he continues. "Some skeptics may respond that 
people have always perceived they live on the cusp of chaos 
but in the end have usually managed well by marshalling 
their ingenuity and courage.

"But today's world is fundamentally different from that of 
the past. The complexity and speed of our social and 
technological systems are unlike anything we have seen 
before and these factors are now pushing against the upper 
limit of the human brain's abilities...[and] have surged 
ahead of our capacity to manage them.

"If we allow the complexity and speed of the system we have 
created to go on increasingly unchecked and if we continue 
to perturb the deepest dynamics of our planet's ecosystems, 
the systems will sometime fail. In other words, non-
linearities will simplify and slow things down for us, 
whether we like it or not."

Modern economies seem to make it unnecessary and 
inefficient to have turkeys and geese wandering around the 
yard - as we do. But it settles my nerves, knowing that - 
if ever my worst fears are justified, and the whole world 
economy goes to hell in a handcart - at least I will eat 
well.

"Fortunately, we have plenty to eat here," Mr. Deshais 
explained. And it is true. For lunch, my mother prepared a 
puree of pumpkin, leeks, stewed tomatoes and fried potatoes 
which we ate with sausage, salad and a goose pate. The only 
part of the meal that was not a product of our garden and 
henhouse was the sausage. 

But that is an omission we intend to correct.

"We've got to get the pigs right away, so we'll be 
protected," he continued.

When he is in his cups, Mr. Deshais is a mess. But he is 
relaxed and friendly, and still manages to keep the garden 
in impeccable order. 

A little more than a year ago, however, he was out drinking 
with a friend...who had a bad auto accident driving himself 
home. (Our gardener had his own driver's license taken away 
by the gendarmes well before this incident.) The friend 
died, for which Mr. Deshais holds himself partially to 
blame. 

(The friend, by the way, left a widow with an immense 
chateau...to which I will return in future letters.)

About that same time...Mr. Deshais's family had had enough 
of him and threw him out. At least for a while, he was 
reduced to sleeping in a tiny travel trailer parked in the 
middle of a field. 

Under the combined pressure of guilt and inconvenience, our 
gardener decided to give temperance a try. 

But he is a different man when he is sober. He is nervous, 
and worries about a breakdown in the division of labor.

"Worries" is not exactly the right word...for Mr. Deshais 
would greet an economic disaster in the same spirit a duck 
welcomes a rainstorm, or a fire-and-brimstone preacher 
might welcome an earthquake. "See, I told you so..." I can 
almost hear him say.

Some people look upon innovators as though they were the 
salvation of the world, and think that every new thing is 
progress. To these people, each passing year brings the 
world closer to perfection 

But there are other people who would like nothing better 
than see innovators fall flat on their faces and consider 
new things to be the Devil's Own Work. 

Mr. Deshais drifts to this latter side of the spectrum like 
a compass needle to the magnetic north. 

"We have no idea what is in the food you buy at the store," 
he explains. "With this genetic modification...and all the 
chemicals they use....no, no, no...I won't eat that stuff. 
You have to produce it yourself - locally, the way they 
always did, so you know it is good."

Just reporting....

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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