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Contributed by Bill Bonner
Publisher of: The Fleet Street Letter

PARIS, FRANCE 
WEDNESDAY, 11 APRIL 2001 

 

Today:  Fair Warnings

*** Rally is on! Maybe...

*** Techs climb dumbly...is it time to buy? Are we
kidding?

*** "Stocks to Avoid!"...Buy Bonds?...Market to fall
another 75%...global cooling...porno...could there
be more? You bet!

*** The rally we've been expecting finally seems to
be underway. The Dow rose 257 points; the Nasdaq
jumped 108 points for a 6% rise.

*** The Dow is back over 10,000. Two times as many
stocks rose on the NYSE as fell. AMZN floated above
$12.

*** "Technology stocks climbed smartly," says a New
York Times report. May we suggest another adverb?
How about 'stupidly?' Or 'naively'...'foolishly'...
'recklessly'...A lot of words come to mind to
describe the rise in Techs yesterday, but 'smartly'
is not among them.

*** "Fundamentally, most of these stocks have
discounted the depth of the slowdown that we
expect," a fund manager told Reuters. "These stocks
are beginning to stabilize."

*** Stabilize? At 23 times earnings? A chart in
Grant's Interest Rate Observer provides a point of
reference. The chart tracks the price-earning ratio
of the S&P 500 from 1872 to the present. In the late
19th century, the ratio hit 25 - a high. Thence, it
fell back down to the average - 14.5 - and kept
falling until it at last hit bottom in the early 20th
century at about 5.

Then, we see the line bounce up and down, finally
hitting the 25 mark again - just before the '29
crash. Again, it fell - this time to a low of about
7 in the '40s. Then, in 1992, the S&P 500 P/E ratio
hit the 25 mark again, but this time it did
something it had never done before - after a brief
dip, it rose even higher - reaching 35 in the late
'90s. The chart shows the average P/E today at
22.6...and apparently on the way down. Will it go
all the way to 7 or even 5? I know you can do the
math as easily as I, but this suggests a possible
drop of 75% or so from current levels.

*** An essentialist investor, John Boland, is quoted
in a recent issue of Grant's. Boland, once a writer
for Barron's, settled in Baltimore and makes a
living finding decent companies in distress. He is
the general manager of Remnant Partners, LP, and
estimates that 30% of his current holdings sell for
less than the value of the current assets. Grant's
must have posed the question: 'is it time to be a
buyer?' Boland's answer:

"To get to a reasonable valuation level on the real
companies that got over-inflated - never mind the
ones that shouldn't exist - you could still go down
75%."

*** An article called Optimist's Dilemma on page 60
of the May 2001 issue of Worth magazine names the
following as "stocks to avoid"...

CISCO
GATEWAY
DELL
INTEL
DUPONT
KNIGHT RIDDER
ERICSSON
SUN MICRO

Probably good advice. But it would have been more
useful a year ago.

*** "Bulls are bold because the market is in the eye
of the storm," writes Bill King this morning. "There
are no impact economic releases for a while;
earnings reports will soon commence; and observant
operators note Greenspan has increased credit
creation. It's hard to stay short when M3 explodes a
mind-numbing $65.9 billion in one week; and many
believe the PCG bankruptcy is the denouement...
coupled with Al's even more aggressive credit
creation, it's a replay of the bailouts on the Asian
Contagion, Russia, Mexico, etc."

*** Trouble is, says King, Easy Al has been
following the market. "Greenspan never contracted
the money supply, or restrained credit like previous
Fed-induced economic downturns for
inventory/inflation. This downturn is due to over-
investment, which is due to over-promiscuous credit
creation. These downturns take much longer to
correct than 'inventory adjustments'."

*** The quarter just ended saw $31.8 billion in
corporate defaults - more than ever before. "Debt
Default to Peak in 2002," declares the headline in
the Financial Times, referring to a Moody's report.

*** My friend, John Mauldin, believes bonds may be
the "heads I win, tails you lose" investment of the
year. "If the economy goes into the tank," he
writes, "Greenspan will keep lowering rates and
bring long term rates down with them, thus
increasing the price of long-term bonds. If the
economy recovers, surpluses are likely to be larger
than forecast and therefore mean a reduction in the
supply of bonds, forcing down rates and increasing
the price of bonds."

*** But bonds fell sharply yesterday. Yields on 10-
year Treasury notes rose above 5%. Greenspan may be
cutting rates, but Mr. Market seems to be headed in
the opposite direction - increasing the cost of
borrowed funds.

*** Not only is Mr. Greenspan unable to find the
perfect fed funds rate...when he pushes in one
direction, the market goes in another. Advice to Mr.
Greenspan: announce that you have a rare disease and
are forced to retire. Later on, you can announce
that you are cured.

*** Sticking to the essentials here at the Daily
Reckoning, we're always on the lookout for
inexpensive investments. The essential rule is 'buy
low, sell high.' We have little control over the
second half of the formula, but at least we can get
the first half right. What's cheap today? Well, the
Chilean airline, Lan Chile, is selling for 7 times
earnings. Other bargains in Latin America:
Telephonos de Mexico at 9 times earnings, and the
Brazilian bank, Unibanco, at 8 times earnings.

*** Gold is getting cheaper, too. It dropped a
dollar yesterday. Is it cheap enough? I don't know.
"Gold is classically a hedge against inflation - and
a protection against severe political upheaval,"
observes the Fleet Street Letter's Brian Durrant
from our team in London. "But, it is not
particularly well suited as a 'safe haven' in a
recession where low inflation or falling prices are
the norm." (see: Shine On You Barbarous Relic)


*** "...even as the 'new economy' falters," says an
article in IHT, "the NUDE economy keeps going
strong" (emphasis added)... "There are not many
industries that can call themselves recession-proof,
but pornography companies can make the argument more
credibly than most." According to the article, the
number of visitors to pornography sites grew more
than 27% from December 1999 to February 2001. In the
same period, general retail sites grew less than
half that rate. "And the adult-content companies
have profit margins that their owners cheerfully
acknowledge are obscene."

*** Feeling guilty about turning up the thermostat?
Thinking about moving to higher ground? Relax. Los
Angeles Times reporter Robert Lee Holz: "Global
warming is far from an established phenomenon.
Ground-based and atmospheric measurements have
yielded conflicting results. While Earth's northern
hemisphere has warmed about 2 degrees Fahrenheit
since the Industrial Revolution began, there is
equally compelling satellite data suggesting that
the rest of the world is actually cooling."

"The case is non-proven, as even a moderately close
reading of the IPCC's 'Summary for Policy Makers'
makes clear," adds journalist Alexander Cockburn.

*** I've come back to Paris. There are too many
distractions out in the country. Mr. Deshais wanders
around talking to himself. And Pierre was working
down in the shop - making an iron gate. I went in
and found him cranking on a noisy handle in front of
an antique forge. Sweat dripping from his arms, he
was pumping air into the coals - while holding a
metal bar in the fire. When the metal turned white
hot, he took it over the anvil and pounded it into a
circular shape. It was a lot more fun watching
Pierre than working on my laptop computer.

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FAIR WARNINGS

One of the hazards of having the world's most
celebrated economy is that you will puff out your
chest and pontificate. Economists, politicians and
journalists - that is, people who had no hand in
creating the wealth and no clue as to how the
economy really works - find the bait irresistible.

Thus it is that Reuven Brenner, who "holds the Repap
Chair of Business" at McGill University, put down his
chair long enough to offer advice in the current
issue of Forbes Global magazine.

What causes one country to prosper and another to
flop around like a dying fish? "Contrary to popular
belief," Brenner advises, "democracy - that is
giving the people the right to vote - does not by
itself bring about prosperity. Mexicans have had the
right to vote for seven decades, yet Mexico remains
a poor country. Meanwhile, people in Hong Kong had
no right to vote, yet that city has prospered."

Nor is access to natural wealth the key to
developing the unnatural kind. "In spite of their
abundant natural riches," he notices, "these
countries [Mexico, Argentina, Venezuela, Brazil,
Zaire, Romania...even Canada 'in a sense'] either
stayed poor or fell behind. At the same time, such
crowded resource poor and disaster-rich places as
Hong Kong, Singapore, South Korea, Taiwan, Japan,
Israel and even Ireland have thrived..."

What burden is it that both Canada and Zaire carry -
a burden so heavy that it prevents them from making
economic progress? I am about to tell you, dear
reader. But I do so only for the purpose of
entertainment.

"Put simply," says chairholder Brenner, promisingly,
"prosperity is the consequence of one thing only:
matching talent with capital and holding both sides
accountable."

Forget savings, forget hard work, entrepreneurial
spirit, attitudes, customs, money supply, tax rates
- just make sure that the risk-taker and the money-
lender connect with one another, and you're on your
way to wealth.

How come entrepreneurs and capital providers don't
get together in poor countries? Well, says Professor
Brenner, it's because the powers-that-be don't want
them to do so.

"Making capital markets open to all diffuses power
and threatens the privileges of ruling
establishments."

So now you know why sub-Saharan Africa lagged behind
Europe in the Industrial Revolution. The Zulus and
Hottentots refused to open their capital markets!
And so did the Mayans, Iroquois, Canooks and Incans.
The silly things. If only they had been able to stop
sacrificing maidens long enough to allow people to
securitize assets and derivativize investments.

And now we see their descendants making the same
mistake - despite the fact that they have Professor
Brenner telling them what to do.

So, let me get this straight, Professor. The
Powhatan tribesmen, doing their toilette on the
banks of the Potomac...and the Dayaks on the shores
of the Straits of Singapore had the same problem:
closed capital markets. Why were they closed?
Because the chiefs wanted them closed - so they
could protect their privileged positions.

But in Europe, capital markets were less closed,
because...? At this point, the customary thing
to say is that "In fairness, I have not read
Professor Brenner's book, only the article in
Forbes..." But we rarely use the word 'fairness'
here at the Daily Reckoning. We don't use words such
as 'dyscrasia' or 'inosculate' either, but only
because we don't know what they mean.

We know what 'fairness' means. We just don't trust
it. So let us try 'ridicule.'

Certain groups do far better than others, even with
the same access to capital markets. American Blacks,
for example, seem unable to take full advantage of
U.S. capital markets, while immigrants from East
Asia and Jews do spectacularly well. In fact, some
groups seem to do pretty well for themselves no
matter where they find themselves - the overseas
Chinese, for example.

Who knows, maybe Professor Brenner has answers to
these questions.

But if the key to prosperity is merely open capital
markets, what is the key to opening capital markets?
Surely, European powers-that-used-to-be were no less
desirous of protecting their status as the
privileged elite on other continents. Surely they
sat around too, and said to one another: 'we have
to keep these capital markets closed.'

And now we have the U.S. economy as the #1 example
of what open capital markets can do for a country.
Even after a $6 trillion setback - it is still the
envy of the world.

So why not puff and blow about it?

"If the developed countries want to sustain and even
increase the prosperity of the past two decades,
while also helping the rest of the world to prosper,
they must turn the new century into a financial
one," urges Brenner. "They must use their
negotiating powers and impose narrowly defined
mandates on the IMF and the World Bank. People
should first be given a stake in their own
society..."

I love the grandiose talk of presciptivist economists,
don't you? It is so quaintly dirigiste...so charmingly
20th century... "Give people a stake in their own
society." It sounds so good, so wholesome, so fair -
but you can't trust it. What could it possibly mean?
Who could possibly give what to whom? According to
Brenner, the reason people do not have open markets is
because the powers-that-be don't want them open. These
same powers must be the ones who would do the giving,
wouldn't they?

The idea must be that under the cudgel of the World
Bank or IMF, the elites will be forced to permit
Merrill Lynch to sell junk bonds to Borneo savages.
Won't that get things moving!

Maybe it is a typo. Maybe he meant people should be
given a 'steak' in their own society. Now there's
something that should appeal to the carnivores.

But the most remarkable thing about Professor
Brenner's hypothesis is the way he credits America
with not only fairer and more efficient capital
markets, but fairer hearts, too.

"From ancient times," he remarks, "through a wide
variety of regulations, rationalized by a wide
variety of theories, those in power have maintained
a stranglehold on capital markets."

But somehow, the powers-that-are in the U.S.
government, the World Bank and the IMF are supposed
to be immune from the desire to protect themselves
from competition.

"Let's hope that the leaders of America will learn
to leverage this strength," Brenner concludes.

Perhaps it is a new world after all.

Writing to you from Paris, France, the City of
Light...

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 11, 2001

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