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* * * * * * * * * * * * * * * * * * * * * * * * *
*** The dream: "Europe is - by definition - the
economic haven of the developed world and this has
to be recognized by the financial markets sooner
- Pedro Solbes, the EU's commissioner for monetary
affairs, to a roomful of currency traders and
money managers this weekend,
*** Reality: "France, with German assistance,
blocked an attempt to liberalize the EU's
protected fiefdoms in electricity and gas,
refusing a target date of 2005."
*** According to the International Herald Tribune,
the European Union summit meeting this weekend in
Stockholm ended just as it began - mired in hubris
and politics. The euro dropped to 88 cents.
*** The dollar index closed at 116 on Friday, near
its historic high. While Europe gets its act
together, the world continues to ask "if not the
dollar, then where?" Near capitulation in the US
stock market... and a historic current account
deficit - is having little effect.
*** In case you are curious, Bill has taken an
early flight to Rome this morning... so the notes
you are reading were written up by Addison. They
are short... and you'll find a DR classique
New Era R.I.P. (It's a good one).
*** But first let's check in with Mr. Bear. It
seems he took a breather from his grueling workout
on Friday... the Dow rebounded 115 points to close
at 9504. The rally put an end to two weeks of
heavy losses, which totaled over 1200 points by
the close of markets on Thursday. The Dow is down
12% for the year.
*** The Nasdaq and S&P 500 also closed higher on
Friday... up 30 and 22 points respectively, but
remain deep in bear territory. For the year the
S&P is down over 13%.
*** The Nasdaq is off 34% since February 1st. The
tech-heavy Nasdaq 100 is down 27.2% so far this
year. "With over $4 trillion in market cap wiped
out in the past 12 months," says The Dismal
Scientist, "or the equivalent of 40% of US GDP,
caution is now the rule."
*** In February, mutual funds saw the first net
outflow in 10 quarters, since the 1998 Russian
*** Gold gained $3 to close at $261... oil dropped
to $27.30... gas rose slightly to $5.27.
*** A French franc, loosely pegged to the euro, is
only worth $.13... in Paris you can buy a bottle
of decent table wine for about 8 of them.
*** "Dividend yields signal a longer bear market"
sports a headline in CBS MarketWatch. "Admittedly
the stock market's dividend yield is hardly
riveting cocktail chatter," the article states...
authored by non-other than Daily Reckoning
contributor David Tice, "yet it is only in the
last half decade that dividends have been of
*** From 1802 to 1900, says Tice "stocks provided
a return of 5.9%, with dividends accounting for
5.1% - or almost all - of the gains. Over time the
rising price of stocks themselves increased in
importance. Still, from 1900 to 1995, dividends
chipped in 4.9% - almost half - of the market's
9.8% return." But, "from 1995 through 1999
dividends contributed just 2.1% a year compared to
the massive 26.3% total return over the period."
*** Since 1995, Tice explains, the price of stocks
has been so high that the role traditionally
played by dividends has diminished. Elevated
stocks prices mean a lower yield. And as a result
less money is available for reinvestment.
Currently, stocks are yielding about 1.1%.
"Today's dividend yield," even after the recent
shakeout, says Tice "is closer to a market top
than a bottom. The paltry payouts may be telling
investors who think the bear market is over to
wait. And then wait some more."
*** "What do we ALL know for sure?" asks Kevin
Klombies... reflecting the 'group think' currently
pervading the markets... "We know that both the
U.S. and Japan, which together account for
something like 42% of the world's GDP, are headed
into recession. We know that stock prices are
imploding and that interest rates will continue to
work lower through, at least the summer...
*** "...We know that the price Wall Street charges
for its research (zero) accurately reflects its
value." More below...
*** Marital Deflation: According to the state-run
Vietnamese newspaper Thanh Nien (Young People), a
Vietnamese woman couldn't convince her husband to
dump his younger lover, so she sold him. The
younger woman coughed up $516 to take the man off
the angry ex-wife's hands. I suppose that proves
that even scoundrel husbands aren't totally
worthless... even in these deflationary times.
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NEW ERA, R.I.P. , EXEUNT OMNES ... AND ALL THAT
(First aired 5 May 2000)
What suitable last rites could we give the New
Era ? Should we gather at the grave and say a few
words-like the young, organic farmer of my
acquaintance who, upon burying a calf, admitted
that he had failed to care for it properly. � I
should have called the vet, � said he.
I have never taken much care of the New Era. But,
then again, it seemed to need none of my
attentions. Instead I spent my feeble effores
trying to convince other people that it did not
exist. So, how then can I now bury it ? What last
respects could be given to something to which no
first ones were offered ?
And how could we bury it anyway-since most people
think it is alive and well ? Putting it in the
grave, or even calling it the mortuary, seems a
Nevertheless, you and I will be in on the secret.
The New Era never existed. And to the extent it
seems to live still, it is like El Cid, whose
corpse was propped up on a horse to encourage the
troops and lead them to victory over the Moors.
The troops...the TNT investors in the light-headed
brigade...still believe the New Era lives. They
still buy stocks. They act as if nothing has
But the truth is out. Yesterday's figures from the
BLS showed that, for all the hype and hoopla, the
New Era Has no pulse. Even with all the crunching
done by the BLS geeks, the figures showed
productivity rising in the first quarter of this
year at only 2.4%. This was a disappointment. The
expected figure was 3.7%.
The third and final quarters of last year, you may
recall, produced some very healthy numbers fpr
labor productivity. The BLS recorded the rate of
increase at 5% in the third quarter and 6.4% in
It was on the basis of these numbers that the
historic shift of money from the Old Economy to
the New one was justified and explained. The Old
Economy was said to be growing sluggishly, while
the new one seemed to be propelled forward at
by the incredible productivity gains made possible
by information technology.
� Incredible � is the operative word. Because when
the productivity numbers from last year were
decontructed by Kurt Richebacher and by the
Medoff-Harless duo, they looked less than
credible, if not outright fraudulent. I will not
rehearse the numbers or the statistical
legerdemain that went into them. It was boring
enough the first time.
But even with all the statistical hocus-
pocus...the number for the first qurter came about
at only 2.4%-hardly high enough to justify a New
To put this number in perspective, labor
productivity increased in the United States from
1945 to 1962 at an annual rate of about 3.1%. Then
it declined. Between 1965 and '72, labor
productivity increased only at a 2% to 2.5% rate.
It then collapsed to as low as 0.3%...and remained
around 1% until 1995.
As Dr, Richebacher put it, � After three years of
near-stagnation between 1992 and 1995,
productivity growth all of a sudden began to spurt
in [the last quarter of '95]. What caused
that? � http:/ /www.dailyreckoning.com/rich_report
What caused it , Dr. Richebacher informs us, was
that the BLS changed the way it calculated
productivity. They began looking at what they
called a � hedonic � price index-which took into
account not just the price of computer equipment,
but its computational power. On the surface, this
makes some sense. If a dollar buys twice as much
computational power one year as the next, it is as
if the price of computing power has fallen in
The third quarter of '95 was the first time this
change took effect. It miraculously transformed
2.4 billion dollars in computer spending into 14
billion dollars of output...instantly boosting GDP
by 20%, lowering inflation and increasing
productivity (ouput per hour).
Wow. As more and more money was spent on
information technology, and computation power
continued to follow Moore's law-doubling every 18
months-GDP and productivity numbers were greatly
flattered to the point that they were, like a
woman who has too many facelifts, unrecognizable.
But it was not until the last quarter of 1999 that
this hedonic measure really put the productvity
numbers in their most flattering, even
sycophantic, light. Info tech spending went wild
in the last half of '99-urged to excess by the Y2K
threat. This activity was amplified by the BLS to
such an extent that its message could be heard all
over the world : Six percent productivity was a
triumph...the New Era was paying off !
The number for the fourth quarter, to repeat, was
spectacular. Incredible. It was revised later to
an even more incredible 6.9%.
The only trouble was that it was not real. It was,
like the New Era that supposedly made it possible,
a fraud. More computational power is not the same
as economic growth. And being able to turn out
more computational power for each hour of labor
intput is not the same as an increase in labor
productivity. Like the millions of lines of code
and the millions of miles of fiber optic
cable...computational power is only as valuable as
the money that people are willing to spend to get
it. And that is measured, not by � hedonic �
numbers, but by real dollars and cents.
What the actual rate of productivity increase is,
I don't know. Neither does anyone else who relies
on BLS figures. More than likely, it is below
2.4%-but how far below, we don't know.
Some day we will know. Just as someday, most
people will know what we already know: The New era
is a counterfeit, a phony, a mountebank.
In the meantime, let's get on with the obsequies.
Raise a glass, blow a bugle or bang a drum. The
New Era is dead. Long live the old one.
P.S. Add to Contrarian's Glossary :
Unified Theory of Greed (UTG)-the insight that
we're all greedy SOBs, but the real SOB is the guy
whose greed-whether for power, money, or love-is
not held in check by his wife, the market, or the
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