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Contributed by Bill Bonner
Publisher of: The Fleet Street Letter



Today:  Fort Sumter...and the U.S. Trade Deficit

*** Is the rally still on? It should be...

*** As bad as it gets? People still
spending...going into debt...buying stocks 'for
the long-term"...Dow 20,000 by 2006 – not likely

*** The Daily Reckoning "Blue Team"...Reuven
Responds...and more...

*** Analyst Jonathan Joseph of Salomon Smith
Barney managed to heat up tech investors
yesterday. Cypress - a chipmaker - noted that it
had no orders. "It can't get any worse than that,
can it?" Joseph bellowed.

*** The hot air passing over the embers caused the
chipmakers and other techs to glow - the whole
sector lit up early in the day. But as the day
wore on, the coals cooled; people began to wonder.
What if there were no orders next month too? What
if the 'second half recovery' that investors
expect doesn't come?

*** Is this as bad as it gets? Joseph still has a
job. And Cypress is still in business - and making

*** By the end of the day, the Nasdaq was still in
positive territory - up 47 points. But the Dow had
dropped 89 points. was up over $13.

*** After closing time, Yahoo! admitted that it
had nothing to cheer about - it lost money in the
first quarter and will cut 12% of its labor force.
Coincidentally, Yahoo! also announced that it will
begin selling hard-core porn in an effort to get
profits up.

*** USA Today noticed a widening gulf between what
people say about the economy and the stock market
and what they actually do. People acknowledge a
bear market on Wall Street and a slump on Main
Street. Asked about it, they say they expect the
situation to "get worse before it gets better."

*** But they still buy stocks "for the long-term"
and still spend money - even money they don't
have. "Consumers are having more and more trouble
keeping up with mortgage and credit card debt -
even as they continue to borrow more," says USA

*** Mortgage delinquencies recently reached the
highest level since '92. Personal bankruptcies are
rising too - and are expected to reach 1.4 million
this year, up from 1.2 million last year. Consumer
debt is going up at a 10.5% annual rate and
household debt payments - at 14.29% of income -
are at their 2nd highest level ever.

*** Yet, Harley Davidson reports that baby boomers
are still buying its bikes. Sales rose 13% in the
first quarter.

*** Ralph Acompara, chief strategist at Prudential
Securities, predicted 2 years ago that the Dow
would hit 20,000. Now he says that "all of us just
got carried away." And we'll have to wait until
2006 for a Dow of 20,000.

*** This latter forecast will prove no less
worthless that the first one, we predict.

*** The Mogambu Guru notes that the Nasdaq would
have to rise 250% to break even. "If the stock
[market] started rising right now and continually
made a more normal 8% every year (after tax), it
will take 12 years to break even. So, [the year
2013] your total return is, in round numbers, a
big fat zero. Nice long-term investment there,

*** "With all the money lost in the stock market,"
Mogambu Guru adds, "it's a wonder that nobody is
thinking of gold. At $260 an ounce it is,
literally, selling at the cost of production! No
profit. For the first time in history it is not
even profitable to dig gold out of the ground..."

*** Gold rose $1.40 yesterday.

*** Is the rally still on? I don't know. But
that's what I would do if I were Mr. Market. A
note posted to Richard Russell's website explains
why. First, some history:

In 1966 and then again in 1968, the Dow approached
the 1,000 mark. But then it dropped to a low of
531 in May of 1970. From there it climbed for the
next 2 � years to a new high of 1051 in January of
1973. Investors were sure the bear market was a
thing of the past and that it was clear sailing
ahead. Instead, it was the beginning of the worst
bear market since '29 - from which stock prices
didn't begin to recover until nearly 10 years

*** "A rally a la '71 - '73 would give the
appearance," writes Richard Russell's pen pal, "of
bailing out the underwater investors and would
generate a big sigh of relief. Then, when the
debacle finally hits, no one will worry until they
are really buried. Now, that's perverse."

*** "There is no evidence that the economy is
about to rebound," writes Bill King. "What do they
think, it's a Q1 pullback and then everything's
jiggy? Is Jack Welch gonna start re-hiring and
investing in new plant and equipment? How about
MOT, LU, CSCO, etc? The impetus for recent action
is the stupendous surge in the monetary
aggregates...the Fed is creating credit/money at
double-digit rates. It's the money, stupid!"

*** According to Marc Faber, China is now the
second-biggest recipient of foreign direct
investment (FDI) after the US. "In January 2001,
actual FDI in China increased 21%...which should
continue China streamlines its various
regulatory frameworks." (see: China - Effectively
In The WTO - Is Booming)

*** By the way, Dr. Faber is one of the charter
members of The Daily Reckoning "Blue Team"...

...Haven't heard of the "Blue Team?" Well, I hadn't
either until a few days ago. But Addison's been
working with Dan Denning, Marc Faber, David Tice
and a few others to create what he believes is the
'finest contrarian investment team ever
assembled.' He calls it the "Blue Service" after
the bright blue color of the new website they've

(NOTE: The 'official' announcement for the DR
"Blue Service" will be mailed to you later today...
look for it!)

*** Reuven Brenner (a reader?) responded yesterday
to my essay ridiculing his ideas: "I do not mind
ridicule at all: love it...Thanks for your opinion.
Sorry you wrote it before looking at the book..."
(for more on Reuven's response see: Bonner's Book

*** "You could have a best-seller with your new
philosophy," said my friend Michel at lunch
yesterday. "As long as you don't take it too
seriously. Keep it superficial - those are the
only philosophy books that really sell."

*** Maybe I should give up my career as an
investment writer and focus full-time on philosophy.
There's no money in it, but I wouldn't have to
write everyday - and I would never be proven wrong.
Plus, philosophers get more respect. Even old,
broken down philosophers, like dissipated poets,
go about Paris in the company of beautiful young

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Today is the anniversary of the beginning of the
War Between the States. Southern troops fired on
the Federals at Fort Sumter, S.C, on this day in

What is perhaps most amazing about the conflict is
the way Abraham Lincoln's reputation grew after it
was over. His Gettysburg Address is quoted as an
example of the Republic's most beloved orator in
his finest moment. Yet, the technique of the speech
is little different from Goebbel's 'Big Lie'
approach. Lincoln referred to the American
Revolution, "four-score and seven years ago," and
made it sound as though the fight to subdue the
South was a continuation of the struggle for
independence. It was, of course, the exact opposite.
The South fought for the liberty to decide for
itself how long to keep its blacks enslaved. The
North fought to avoid allowing the Southern States
to go free.

Had the American colonies remained part of the
British Empire, by the way, the Yankees might
never have had a moral pretext for marching
through Georgia. Britain outlawed slavery
throughout its empire in 1838.

Everybody, at one time or another, seems to want
to boss other people around. Prescriptivism is a
fact of life. So is intestinal gas and rap music,
but neither should be let out in public.

What brings this to mind is a cursory look at
recent editorial pages from the International
Herald Tribune. In one column Pat Buchanan tells
the Bush Administration how it should deal with
the Ruskies. In another, the great geo-political
thinker, Maureen Dowd, tells the Bush
Administration how it should deal with the
Chinese. Over on the facing page, The Washington
Post editorial team offers advice to the Bush
Administration on how to deal with Sharon and

But what particularly interested me - as I'm sure
it will you - was the advice offered by two Nobel
Prize winning economists, Franco Modigliano and
Robert Solow. The article demonstrates two things
about people who give advice: they can be very
smart and total numbskulls at the same time.

Let us begin with the positive.

The prize-winning team has noticed what you and I
have discussed often in the Daily Reckoning:

"Throughout [the 1990s] spending grew faster than
what the country earned, spilling over, in large
part, into a growing trade deficit. By the end of
2000, the excess of expenditure over income had
reached about 4% of GDP and was apparently still

"For a country, just as for a family, there are
only two ways of getting the money to spend more
than one's income: borrowing it and selling
assets. In the case of nations, the creditors and
buyers of the assets are foreigners."

The economists note, as we have, that spending
more than you can afford cannot go on forever.
Eventually, the foreign investors and creditors
are going to want their money back. They may begin
to doubt the value of the U.S. dollar...or worry
that their U.S. assets will continue to fall, as
the Nasdaq has done for the last 12 months.

So far, say Modigliani and Solow, "the size and
power of the American economy have protected it
from capital flight...but there is no guarantee
that this will remain true." What's more, once
foreigners begin to drift out of the dollar, U.S.
reserves of foreign currency "would be woefully
inadequate to stem the tide."

The result would be a sharp drop in the value of
the dollar, a rise in the cost of imports, falling
stock and bond prices, higher interest rates,
lower employment and a drop in output.

All well and good. Tall guessing, but what isn't?

But then the two Nobel prize winners cannot resist
the urge to tell the Bush Administration what to
do. Not that the Bush team couldn't use some good
advice, but the advice the economists come up with
is so moronic it makes you wonder about the Nobel
selection committee.

"Many have criticized President George W. Bush's
proposal for a deep and lasting cut in income
taxes," they write, "but hardly anyone has
addressed its implications for...the large and
growing deficit in the international trade

Yes, hardly anyone has. Because to do so would be

Give people back their money? Are you kidding?
They would only spend it!

Prescriptivist economists carry such a heavy
burden on their shoulders, it is a wonder they can
walk. They not only want to set the broad policies
of the U.S. Federal government, but also direct
the behavior of every Tom, Dick, and Harry in the

It is as if a judge, before ordering a defendant
to give back stolen money, turns to the rightful
owner and says, "Wait just a minute...what are you
going to do with the money if we give it back to

Professors Modigliani and Solow do not really know
what people would do with their money. Perhaps the
public mood is already changing, and most people
would use the cash to pay down debt. Or maybe they
would go out to the movies.

Nor do they know what would happen if the money
were not given back to the people who earned it.
It could be that the dollar has already topped out
- and that a dramatic decline is ready to begin.
In either case, the tax cut is probably
insignificant and irrelevant.

"Debt-addled Americans added another $10.5 billion
to their credit card balances in February
[alone]," writes the Mogambu Guru. "The communists
and socialists in Congress are dragging their feet
over a few lousy billions in tax cuts, while at
the same the time the budget is already slated to
be almost two trillion bucks...the government now
takes in the highest percentage of income in all
U.S. history...a fifth of GDP, for crying out
loud, there isn't enough slack for a pittance of a
tax cut? Jeez..."

But Modigliani and Solow know what is best for
people. "A large, permanent tax cut would make the
international economic position of the United
States worse, not better," they say.

On the public stage, these people are tedious
meddlers. But at home they must be insufferable -
telling their spouses how long to cook the
spaghetti and how much to pay for their underwear.
Or, perhaps they have already learned - as so most
husbands do at home - that trying to boss your
spouse around rarely pays. Probably even Lincoln
had the good sense not to try to tell Mary Todd
what to do.

Your editor, sharing his opinions, but keeping his
advice to himself...

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 13, 2001

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