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Contributed by Bill Bonner
Publisher of: The Fleet Street Letter

PARIS, FRANCE 
FRIDAY, 16 MARCH 2001 

 

Today:  Grand Illusion-ll

*** Dow bounces again...but Nasdaq falls more... Margin 
debt in sharpest decline ever....

*** Greenspan: Demi-god...or devil? Did he keep rates too 
high for too long? 

*** Best and worst industries...why not 'sell everything'? 
...belly dancers at Le Pied au Chameau...and oh, la-la, so 
much more...

*** Even a Freudian psychologist, dropped from a high 
enough point, will bounce a little. On Monday, the Dow fell 
436 points. Then, it bounced a little on Tuesday, dropped 
another 317 points on Wednesday, and bounced again 
yesterday.

*** The Dow rose 57 points to close slightly above the 
10,000 mark.

*** It was a relief to bullish investors to see the Dow 
above 10,000...but how long will it last? 

*** Investors must be getting a lot of margin calls. The 
Financial Times reports that margin debt declined 29% last 
year - as investors paid up or got knocked out of their 
positions. This was a sharpest decline in the history of 
the NYSE.

*** Still, at the end of January, margin debt stood at $197 
billion - more than twice the level at the beginning of 
1997, the year that margin debt first rose above $100 
billion.

*** Fred Hickey, who publishes a popular technology stock 
letter, says he expects the Dow to fall to 5,000 and the 
Nasdaq to drop below 1,000.

*** The Nasdaq lost 31 points yesterday, remaining below 
2,000. But who cares about the Nasdaq anymore? The action 
has moved to the Dow.

*** And investors are getting restless. The Wilshire 5000 
has lost 27% of its value since March 24th of last year. 
That represents a loss of wealth of $4.6 trillion, an 
amount equal to half the total annual output of the U.S. 
economy...or about $50,000 per family.

*** "Everyone is out of work and everyone feels like 
they've been the victims of a big Ponzi scheme," said a 
voice at the Silicon Summit II, hosted by Tom Brokaw. 

*** People are not quick to take responsibility for their 
own foolishness. Instead they look for someone else to 
blame. CNBC says it is already getting emails calling for 
Greenspan's resignation. He kept rates too high for too 
long, they say. "Greenspan is the devil incarnate from the 
point of view of ordinary Americans," said Bill Meehan of 
Cantor Fitzgerald. "Some people have seen 80% of their 
pension funds wiped out."

*** From demi-god to devil in less than 60 days? Not quite. 
Most people still think that Greenspan has the power to 
reverse the bear market by lowering the fed funds rate. 
Reuters reports that the "Clamor grows for bigger rate 
cut." 

*** "People ask me why I don't say 'sell everything,'" 
writes James Cramer on TheStreet.com. But Cramer cannot 
understand how lower rates, in an economy that is still 
adding jobs and is not bothered by inflation, can fail to 
lift stock prices. "I want to buy here," he concludes.

*** Out of 8,000 stock recommendations tracked by Zacks.com 
- only 29 were sell signals. "Investors who aren't bullish 
are not very well served," concluded Addison. He's putting 
the finishing touches on a new investment advisory service 
for people who want to make money in the markets, but don't 
believe the Dow or Nasdaq are going up any time soon
...watch this space...

*** Gold fell another $2.60 - as the Bank of England 
auctioned off tons of the stuff. Gold mining companies fell 
an average of 3%.

*** The euro fell below 90 cents in yesterday's trading.

*** The trade deficit hit a new record last year - $435 
billion, up 31% from the $341 billion in 1999.

*** According to the Leuthold Group, the median dividend 
yield for the S&P 500 since 1957 has been 3.4%, the source 
of about a third of the total return from stocks for the 
last half a century. But now, the S&P 500 yields only 1.1%. 

*** Rob Peebles: "The '80s and '90s were the best back to 
back decades for stocks in 200 years. If stock market 
returns revert to their long-term average, stocks could go 
nowhere for some time. The bottom line? The dividend yield 
may be telling investors who think the market is near a 
bottom to wait. And then wait some more."

*** A friend sends me this from "Bigchart.com"...the best 
and worst performing industries over the last 3 months:

Best Performing Industries

Industry Name Percent Change (over time selected) 
Tires 42.26% 
Toys 33.87% 
Auto Parts 31.26% 
Oil Drilling 24.70% 
Autos And Parts 22.49% 
Household Products, Durable 21.43% 
Tobacco 21.28% 
Furnishings 20.80% 
Automobiles 18.15% 
Factory Equipment 18.11% 

Worst Performing Industries

Industry Name Percent Change 
Communications Technology -50.76% 
Advanced Ind. Equipment -41.64% 
Technology, Hardware And Equipment -33.58% 
Technology -32.72% 
Technology, Software -30.21% 
Industrial Equipment -29.70% 
Biotechnology -26.39% 
Wireless Communications -25.73% 
Computers -24.59% 
Consumer Electronics -21.16% 

*** Japanese banks are thought to have 'imbedded losses' 
equal to 5% to 10% of the nation's GDP. "It has reached the 
point where things are going to go bust," said an analyst 
interviewed by the Financial Times. 

*** "Watch Japan. Japan is a particular tinderbox at the 
moment," said Bill Gross of PIMCO, the biggest bond fund in 
the world. "The world's second largest economy is teetering 
on the brink of recession," he added. That means the 
world's two largest economies are both in trouble. Is the 
whole world in trouble? Maybe...more below... 

*** "You mean, the Russians were shooting their own 
soldiers?" Addison asked me. "Why would they do that?"

*** As the film, 'Stalingrad,' illustrates, things happen 
which - even in this Age of Unlimited Information - are 
hard to believe or understand. Stalin sent the young Nikita 
Kruschev - a man who had proven effective at starving and 
murdering millions of Ukrainian farmers - to Stalingrad to 
try to rescue the situation. Kruschev handed a loaded 
pistol to the military commander and told him to blow his 
own brains out - which he obligingly did. Then, Marshal 
Zhukov came to take the command. In one instance, Zhukov 
lined up a group of Russian soldiers and shot every 10th 
man. He warned them that if they tried to retreat, he would 
kill them all.

*** At the beginning of the campaign, the Germans captured 
hundreds of thousands of Russian troops. Few survived 
prisoner of war camps, but if by the grace of God, a man 
lived to return to Russia after the war - the Soviets 
charged him with treason for allowing himself to be 
captured and sent him to Siberia! 

*** On a lighter note, last night Addison showed a few 
friends from the Baltimore office the way to Le Pied au 
Chameau (The Camel's Foot) a Moroccan restaurant around the 
corner from the office. He tells me they dined on among 
other items from the menu - an actual camel's foot (I'm 
sorry I missed it). Afterwards, they danced with a belly 
dancer... her picture is here.
(I'm really sorry I missed that!)

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* * * * * * * * * * * * * * * * * * * * * * * * * * *


GRAND ILLUSION - II

Immediately following the end of WWII Americans turned 
their attentions to making and consuming 'things'. From 
1945 onward, year in and year out, Americans had more 
and more things available to them. 

Household wealth increased each year. Neither wars, 
pestilence, inflation, the incompetence and imbecility of 
government, natural calamity, nor even bulls and bears on 
Wall Street could stop it. Wealth building survived the 
Korean War, the Vietnam War, the Gulf War...recession, 
inflation, stagflation...John Kennedy, Lyndon Johnson, 
Richard Nixon...treasury bond rates of 18%...television...the 
Energy Crisis, Flower Power, Watts... Michael Dukakis, Barbra 
Streisand, Lee Greenwood...disco, a vast right wing conspiracy, 
recovered memory syndrome...Jimmy Carter, Andy Warhol - even 
the Laurence Welk show. 

Through all these horrors Americans added to the 'things' 
they had and the 'things' they were able to make. A bull 
market in wealth building was underway - one that would 
last for more than half a century.

By the mid-1990s, Americans had become the masters of all 
the worlds' 'things' - buying up 20% of the entire world's 
exports, with a dollar that seemed to become more valuable 
with every additional unit in circulation, and an economy 
that seemed to have entered a New Era - where the number of 
'things' an ordinary American family might possess seemed 
almost unlimited. That is, as long as the rest of the world 
was willing to provide these 'things' in exchange for 
dollars...and finance a trade deficit which, last year, 
equaled more than the entire U.S. federal budget during the 
last year of the Carter administration. 

By the late '90s most people have convinced themselves that 
there was something different about this economy from all 
those who came before. For the first time in the history of 
mankind, 'things' seemed less important, economically. 
Instead, it was the 'information' behind things that 
mattered. 

All of a sudden, it seemed like a new world. Anyone could 
make things - anywhere. The real money was in 'information' 
itself. 

Information, it was argued, would eliminate waste, reduce 
costs, and put an end to the business cycle. Previously - 
the Age of Ignorance, you might call it - businessmen 
tended to over-expand and over-produce in good times. This 
led to over-capacity and inventories that needed to be 
drawn down before a new growth phase could begin.

"Information" would make recessions - and bear markets, for 
that matter - a thing of the past. There would be no 
further need for inventories since 'information' would 
allow manufacturers and distributors to match supply 
perfectly to demand. 

Savings are a form of inventory - a reserve of purchasing 
power for capital improvements or unexpected setbacks. But 
the new Information Economy needed little of either. 

Henceforth, there would be no unpleasant surprises...and 
productivity increases and cost reductions would finance 
the fastest economic growth the world has ever seen.

What a wonderful world we had stumbled upon, dear reader - 
an economic Shangri-La...where even time itself could be 
mastered, like a hunting dog. Just whistle and you could 
get tomorrow's profits fetched for you today. It was no 
longer thought necessary to wait for compound interest to 
build wealth. You could have it all - now. 

And you could feel good about yourself - even feel superior 
- as you were mortgaging the family home to buy stock in 
companies that made neither 'things' nor profits. 

Information Age companies were said to have a new form of 
capital, one that didn't show up on the balance sheet: 
intellectual capital.

Who knew what this new capital was worth? Any price might 
be too low.

"Owning brick manufacturers, shoe makers, car insurance 
firms and candy retailers - like Warren Buffett does - 
isn't going to make the world a better place," as info-
believer Porter Stansberry put it recently. "Buffett 
doesn't create wealth like Venter."

Craig Venter is the CEO of Celera, a company that spent hundreds 
of millions to increase the world's supply of information. 
Buffett's companies, by contrast, make old fashioned 
'things'. Buffett's businesses make profits. Venter's does 
not.

In the 1990s, the grand illusion of the Information Age 
took hold of American imaginations. Let the foreigners make 
'things,' they said to themselves, we will consume them. 
Information Age companies reached ebullient levels on Wall 
Street, while the makers of 'things' became nearly as 
demode as gold bugs.

But something remarkable happened last year. For the first 
time in 55 years - household wealth declined. The story has 
gotten relatively little press attention. Like the 
Russian's treatment of its own troops, the report is 
scarcely believable...how could American households lose 
wealth in the very same year that the "Information Economy" 
reached its fulgurous climax?

Could it be that 'things' are still what really matters - 
at least for purposes of calculating wealth? And could it 
be that an economy that turns from producing things to 
consuming them is one that has taken the road to ruin?

"Even in these days of the vaunted New Economy," writes 
author Eamonn Fingleton, "[manufacturing capacity] is an 
absolutely critical factor in world economic competition. 
And the results are apparent in Japan's extraordinary trade 
performance in recent years. In fact Japan's current 
account surpluses for the decade of the 1990s totaled 2.1 
times their level in the 1980s...

"And how has the United States been doing on trade? The 
contrast with Japan could hardly be more startling. As the 
American manufacturing base has shrunk, America's trade 
deficits have soared. For 2000, the current account surplus 
is likely to be a record 4.4 per cent of national output. 
By contrast, the worst deficit in the 1980s was just 3.6 
per cent national output - a record that was widely 
considered disastrous at the time...

"In fact, so strong are Japanese savings that Japan is now 
exporting more capital in real terms than any nation since 
America's days of global economic dominance in the 1950s. 
While the Japanese economic bureaucrats are loathe to draw 
attention to this fact for fear of fanning protectionist 
sentiment in Washington, the results are starkly apparent 
in little-noticed IMF financial statistics for national 
external balances. These show that in the first nine years 
of the 1990s, Japan's net external assets jumped from $294 
billion to $1,153 billion. Meanwhile, America's net 
external liabilities rocketed from $49 billion to $1,537 
billion."

So, I put the question to you, gentle reader, who got rich 
in the 1990s? The people who made 'things' while their 
stock market collapsed? Or the people who produced 
'information,' while prices of their stocks soared?

And now that the 55-year-long bull trend in wealth building 
in America has been broken - what comes next?

We will see, dear reader, we will see.

Your correspondent...

Bill Bonner


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

The Shocking Final Stage of the Internet Revolution 

Strap on your seat belt. It's going to be a bumpy ride. The 
financial markets have entered an entirely new phase. In 
fact... 

The New Era ended on May 4th, 2000. 

That's the day the Bureau of Labor Statistics officially 
reported that U.S. productivity growth was much lower than 
expected. The whole premise of an economy that could borrow 
and spend its way to "inflation free" growth forever was 
finally revealed for what it is - a complete and total 
sham. Now, the smart money has moved on...click here to 
learn: 

http://www.agora-inc.com/reports/FSUS/TheBearEra
* * * * * * * * * * * * * * * * * * * * * * * * * * *


 
 
 
 
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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