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Contributed by Bill Bonner
Publisher of: The Fleet Street Letter

PARIS, FRANCE 
WEDNESDAY, 28 MARCH 2001 

 

Today:  The Mighty Fallen

*** Rally continues..."a little bit of happiness
has come back..."

*** Adoration of the Fed chairman - corrected...
Buffett A 'Dirt Bag'?

*** Chief economists' views...incomes fall...
barbarians...very big whores (not on Wall
Street)...and more!

*** The Rally on Wall Street continued yesterday,
boosted by the latest consumer confidence report.
For the first time in 6 months, consumer
confidence rose in March. "A little bit of
happiness has come back," said Sam Ginzburg at
Gruntal.

*** The Dow rose 260 points. And the Nasdaq went
up too - 53 points.

*** And now that the Dow is no longer officially
in a bear market (no longer down more than 20%
from its high) investors are hoping for a lot more
happiness.

*** How much happiness are they likely to get?
Richard Russell, a Dow theorist, suggests that the
50% mark is the critical point. The Dow lost 2333
points from its top of 11,722 on January 14, 2000.
So, a 50% rally would put the Dow back to 10,555
or so. If it goes beyond that level, you may
expect a new high, says Russell. If it fails to
reach that level, look for the market to resume
its bearish trend.

*** The bear market has been slow to develop. But
then, the bull market lasted 18 years. But now
that the bearish trend seems underway - those of
us who predicted it (as far back as 1983 in some
cases...ahem...) are beginning to feel more
confident. It all looks so simple - like such a
textbook case: stocks get inflated to preposterous
levels...then they get deflated. The boom will be
corrected, even over-corrected - with the Dow
trading down to about 3,000 and the Nasdaq below
1,000.

*** And yet, it can't be as simple as that, can
it? Is Mr. Market that transparent? Has he no
tricks up his sleeve?

*** The adoration of Alan Greenspan is being
corrected. He "became adored by a new generation
of equity market investors," says the Financial
Times. But now "his reputation is being destroyed
by the bear market."

*** "Suddenly, the world's most powerful central
banker is under fire for not doing nearly enough
to keep the U.S. out of recession..." says
Toronto's Globe & Mail. More below...

*** "We believe the Fed delayed the onset of
recovery by several months," said Bruce Steinberg,
Merrill Lynch's chief economist.

*** Ed Yardeni, the top economist at Deutschebank
Alex Brown, agrees. The Fed should have cut rates
by 100 basis points, not just 50, on March 20th, he
says. "Of course, it's not too late," he adds,
"They still have 500 points left."

*** How would Yardeni, Steinberg, or Greenspan
know what rate the economy needs? They have no
more idea than you or I, dear reader. Last week it
looked like many more rate cuts would be needed to
turn the economy around. But today - with stocks
and consumer confidence rallying - it looks as
though we could be off to the races again.

*** An alternative interpretation: there is no
magical Fed funds rate. "Is Recession Certain, and
Needed?" asks a Washington Post article.
"Recessions happen," says Stephen Roach, chief
economist at Morgan Stanley Dean Witter. "And for
a U.S. economy plagued with excesses, a downturn
may be the only way to purge the reckless
tendencies."

*** In the 4th quarter, for example, household debt
rose more than 7 times faster than GDP - 8.5%
compared to only 1.1%.

*** And the Boston Globe reports that the "Boom
Did Little for Typical Families." The article
cites a study that found median income in
Massachusetts declined 10% from 1989 to 1999.
Average income rose only 3% - reflecting the fact
that people at upper income levels got richer
while the poor got poorer. In Connecticut it was
worse - with median income down 14%. "If this is
true when the economy is red hot, what happens
when it slows down?" asks the paper.

*** "If households were to respond to falling
stock prices by even modestly increasing their
savings," adds the Washington Post, "economists
warn that the corresponding decrease in spending
would almost certainly tip the economy into
recession."

*** Here at the Daily Reckoning we suspect that
there is no perfect interest rate that somehow
avoids a bear market and a recession...and that
Americans' excessively low savings rate (negative
0.8% at last count) is likely to correct along
with everything else. But we confess: we don't
know any more than Yardeni, Steinberg, Roach or
Greenspan.

*** Productivity grew at a dismal 2.2% annual rate
in the fourth quarter, down from 8% annual growth
a year earlier. John Myers: "If productivity falls
much further it will be in the range of the 1970s,
a period of dismal stock performance."

*** A bill that would "dramatically overhaul the
nation's bankruptcy code" and change "the
centuries-old concept of being able to discharge
your debt and enjoy a fresh start" is on the fast
track to becoming law, according to SFGate.com.
"Hard to believe creditors were smart enough to
get all their ducks in perfect order just as the
U.S. began to slip into the economic mire," writes
my friend Rick Ackerman. "Wait till Joe Sixpack
finds out in a few years what this bill is all
about."

*** "There's more 'sublease space' coming on the
marketplace," reports Eric Fry from
GrantsInvestor.com. "And it's not just from
dot.coms, but from all the 'camp followers' - the
folks who service dot.coms......the lawyers, the
accountants, and consultants. When looking at the
effect of a dot.com downdraft, you have to look
beyond just the immediate tenants to include the
'service' tenants." (see: REITs For Sale)

*** Is Warren Buffett a "rent-seeking dirt bag"?
Porter Stansberry thinks so: "Warren Buffett's
largest business is insurance. How many laws
require you to have different types of insurance?
How many legislatures mandate regulations on
insurance providers? Why do you think Warren
Buffett takes such a liberal stand on estate
taxes? Why would Warren Buffett be in favor of
allowing the government to take 55% of your assets
at the time of your death? Perhaps because the
best way to avoid such a tax is to buy life
insurance from one of his regulated pseudo-
monopolies?!!" (The Blast, Porter's free daily e-
mail...http://www.pirateinvestor.com.)

*** Rome is so colorful. Buildings are various
shades of pink, beige, brown and yellow. And the
colors fade beautifully. "Paris was once like
this," explained my companion, an architect. "But
now the whole city is gray."

*** Rome is much more chaotic than Paris. The
streets wander around higgely-piggely, uphill and
down. Ancient walls support new ones - with the
relics of centuries scattered around like debris
after an earthquake. But in order to appreciate
Rome you have to do your homework first. To most
tourists, the derelict columns, monuments, and
ruins are as incomprehensible as they were to the
Visigoth barbarians who sacked the city in 476 AD.

*** Back in Paris, I walked down the street next
to the office. The three whores who seem to have a
franchise on the street were all there. But one
had left her usual doorway and positioned herself
in the path of a small truck. She is a huge woman,
with a broad face and thick, bleached blonde hair.
She wears a short fur coat and, apparently, little
else. Almost all of her legs are on display -
which is too bad, for they are the size and shape
of concrete posts - barely even tapering as they
reach the ground. They look like they should be
supporting a football stadium instead of a middle-
aged woman. With these pillars visible I shudder
to think what lies hidden.

As big as she is, she looked like a fair match for
the little delivery truck. The truck tried to
advance. She held her ground, with her big legs
apparently anchored to the street like utility
poles. The driver honked his horn...he pleaded
with passers-by to get the crazy whore out of his
way. And finally, for no apparent reason, she
stood aside.

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THE MIGHTY FALLEN

Reputations are being corrected...along with stock
prices, savings rates, and philosophies.

Today's letter continues our enjoyment of the bear
market. Bear markets do not come along every day.
Like snow holidays, you have to take advantage of
them when you can...

I have more examples of chicanery and the wages of
sin...but I will save them for another occasion.
Instead, today's dramatis personae are neither
crooks nor scalawags. And their faults, which are
unlikely to give cause for legal action, are as
much the results of others' mistakes as their own.
They sang their songs...who could blame them if
the fans screamed, knocked down fences, and made
fools of themselves?

One: a captain of an industry he practically
created on his own. The other: the world's most
trusted, and many would say most powerful,
bureaucrat.

Of the former, TIME magazine gushed: "Jeffrey
Preston Bezos ...peered into the maze of connected
computers called the World Wide Web and realized
that the future of retailing was glowing back at
him."

At 35, Bezos became TIME's Person of the Year.
"Every time a seismic shift takes place in our
economy, there are people who feel the vibrations
long before the rest of us do," rattled TIME,
"vibrations so strong they demand action - actions
that can seem rash, even stupid."

Well, yes.

"Amazon looks more and more like it is indeed
doomed," I wrote, a week after Jeff Bezos appeared
on TIME's cover. "The company used the Christmas
season to test the old saw - that you can lose
money on every sale and make it up on volume."

Sales go up at the big River-of-No-Returns
company. But profits? Amazon lost $545 million in
the 4th quarter of 2000, up from a loss of $323
million in the same period the year before.
Cummulative losses for the company almost exceed
$3 billion.

"But Amazon's losses," TIME witlessly continued,
"are also a sign of the New Economic of Internet
commerce. These new rules spring from the idea
that in the new global marketplace whoever has the
most information wins."

"It's a revolution," TIME declared. "It kills old
economics, it kills old companies, it kills old
rules."

Well, yes.

Some people get rich in a revolution. Some people
get killed. So far, people who have invested in
Amazon have been the ones whose heads have been
guillotined. The stock price has fallen 83% - down
to the $10 range. And Downside Deathwatch says the
company will run out of cash in July of this year.

Gretchen Morgenson, writing in the N.Y.Times
thought Bezos deserved another honor. She gave him
the "Fame is Fleeting Award...for one of the
fastest falls from grace in recent history. A year
ago he is TIME's man of the year; now he is facing
irate shareholders..."

Meanwhile, public servant Alan Greenspan was
credited with managing the nation's economy so
perfectly that stocks would rise forever. Now he's
getting the blame when they go down.

"A year ago," write E.J. Dionne in today's
International Herald Tribune, "this wasn't even
thinkable. Now Wall Street is all over Mr.
Greenspan. He is accused of having kept interest
rates too high for too long last year, and then
not cutting them fast enough in recent months."

Mr. Dionne says he believes this himself. "The
genius of Mr. Greenspan until last year," he says,
"lay in his willingness to put aside his older
views about how fast an economy could grow without
inflation. Partly because globalization and
technology were cutting costs, he decided this
economy was more capable of sustaining rapid
growth with low inflation than were the economies
of the '70s and '80s. He was right. Applying that
same view might have led him to keep rates lower
over the last year or so."

People who believe that central bankers can manage
an economy have a ready explanation for the
recessions and bear markets: somebody made a
mistake.

In the simple-minded vision of the public and
newspaper columnists there is no reason for
economic slumps other than human error. "It is the
job of the Federal Reserve to fight recession,"
writes Roger Klein of the Klein-Wolman Letter.
Thus does the fate of the entire world economy
rest on Mr. Greenspan's shoulders. He either gets
it right or gets it wrong...rates could be too
high...or too low...or just right.

"This is beyond idiocy," comments Richard Daughty
of the Mogambu Guru letter. "The New Mantra is the
same as the Old Mantra; the Fed will cut interest
rates by some magical fraction of a percent and
the stock markets and economy will climb to new
heights forever. If it were so, the entire corpus
of economics could be replaced by a 3 x 5 card
reading: 'Interest rates are inversely
proportionate to economic health.'

Alas, dear reader, it is not that simple. Maybe
the economy and the stock market will rally. Maybe
the bottom for this cycle has already been seen. I
don't know.

But of one thing you can be sure: whatever happens
Mr. Greenspan will be blamed or credited. In
either case, unfairly so.

There were bubbles and panics long before there
was a central bank. And there will be bubbles and
panics long after the Federal Reserve system is
discarded.

"This is by no means the first stock market
bubble," writes Gregory R. Spear of The Spear
Report, "and it certainly won't be the last.
Hopefully, we will all live to take advantage
of the next one. (I think it may be in biotech.)
Bubbles have been studied by market historians
and have been found to have common characteristics.
The principle of the 'reversion to the mean'
applies to them all. In that oscillation process,
markets tend to overshoot on the way up and to
overcorrect on the way down. While history does
suggest that eventually many of the pieces of
Humpty Dumpty do get put back together, the
basic conclusions historians draw is that it
always takes longer to repair than people
typically hope or expect - usually years, not
months. Many of the stocks caught up in the mania
fail to survive, as we've already seen in the
dot.com debacle. Of those that do make it,
all but the very strongest perform less robustly
than before."

Amazon may survive. Or it may not. But neither
Bezos nor Greenspan will ever again be the men
they were in 1999.

Mr. I-told-you-so,

Bill Bonner
Gloating...


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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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