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Contributed by Bill Bonner
Publisher of: The Fleet Street Letter

MONDAY, 7 MAY 2001 


Today:  Is The Pain Over?

*** Higher unemployment? No on,

*** But how can people without jobs keep spending?
Uh...good question...

*** Dusting off the 'I' on the
rebound? 'not so fast' warming...and more!

*** Friday's unemployment report came in worse than
expected...again. But the stock market shrugged off
the bad news...again. Employers trimmed 223,000 non-
farm jobs from their payrolls in April, boosting the
unemployment rate to 4.5%, from 4.3% in March.

*** Not the least bit troubled by the news, the Dow
raced ahead 154 points, and the Nasdaq tacked on 45.
For the week, the Nasdaq advanced 5.6%.

*** Precisely characterizing the new-and-improved
mood on Wall Street lately,'s Igor
Greenwald writes, "Unemployment on the rise? Maybe
that just means folks will have more time to shop.
Party on, dudes."

*** When stocks get a hankerin' to head higher, dear
reader, they're not about to let bad news - nay, not
even horrible news - stand in the way.

*** But even if the stock market blithely dismisses
such news for the time being, the economy may not be
able to ignore it so easily. "The United States
economy lost more jobs in April than it had at any
time during the last 10 years," writes the New York
Times' Gretchen Morgenson. "Equally ominous was the
rate of employment growth as measured by a survey of
households; for the first time in a decade, it fell
into negative territory."

*** Morgan Stanley Dean Witter chief economist
Stephen S. Roach told Morgenson "In the face of
rising joblessness, consumer confidence gets hit.
That will take personal consumption growth well
below the 3 percent pace we've been cruising at
during the last couple of quarters."

*** Investors seem to be living in a dream world.
They expect rates of return that are very unlikely.
And, they think unemployment can rise with no effect
on consumer spending. When the great bull market of
'82-'00 began, consumer debt equaled 70% of
disposable income. Now, it is more than 100%. Debt
hasn't been a problem - there were plenty of jobs
for everyone in the boom years. But now that
unemployment levels are headed up - people are
finding it harder to keep up with their debt

*** Mortgage delinquencies are at their highest
level since '92. Personal bankruptcies are up 17%
over last year. And credit card debt is growing...
even as more and more people fall behind on their

*** Credit card debt is the most expensive credit
available - why would people take on more of it,
especially when unemployment is rising? Answer:
because they have to. Consumers are using credit
card debt to help make ends meet.

*** And they are also cutting back on spending. The
savings rate rose from minus 1% in February to minus
0.8% in March. Not exactly Japanese-level. But it
could be an important harbinger of things to come.

*** Chip stocks may be bouncing, but worldwide chip
sales definitely are not. The Semiconductor Industry
Association reported last Wednesday that chip sales
in the month of March slipped once again, expanding
the industry's relentless slide. March chip sales
totaled $14.4 billion, seven percent lower than the
$15.4 billion recorded in February.

*** James Padinha is one of a growing throng of
economic forecasters dusting off the "I" word:
Inflation. It strikes Padinha as "odd" that in five
months the Fed went from being concerned about
"heightening" inflation risk to not being concerned
at all. He writes, "Last month, we found out that
average hourly earnings are growing at 4.3% year-
over-year, the fastest pace since May 1998. We also
discovered that the Cleveland Fed's median CPI is
rising at a 3.4% year-over-year rate - its fastest
growth since February 1996. Now add the knowledge
that the funds rate has dropped by two full
percentage points in less than four months, that
real short-term interest rates are lower than they
have been at any point since the spring of 1994,
that the M-2 measure of the money supply is already
growing at 8.2% (on a year-over-year basis), and
then answer me this: Should the Fed be (a) less
concerned about inflation than it was in November,
(b) just as concerned, or (c) more concerned? I'm
coloring in the (c) oval on my answer sheet, and I
can probably even talk myself into changing it to
(b) if I see the smart girl in front of me picking

*** Northern Trust chief economist, Paul L. Kasriel,
concurs with Padinha, more or less. Concerning the
latest slew of interest rate hikes, Kasriel writes,
"Alan Greenspan is firing live ammunition now as
opposed to the blanks he was shooting in the early
1990s...Rapid money growth today is going to push
inflation higher, which ultimately will force
Greenspan to reverse course and raise interest
rates. That will be the economy's coup de grace."

*** Fifty-five e-companies went up in smoke during
the month of April, the second-highest number ever,
according to a report from

*** As only 44 such companies went out of business
the month before, it seemed momentarily, as though
the worst had passed. "Many people had decided that
March was the end of the bad news," says Tim Miller,
president of Webmergers. "But with April's
skyrocketing numbers, you have to tell them: Not so

*** Once again, labor and management are exploiting
the capitalists: "The value of [Capital One's CEO]
Fairbanks options increased by about $160 million in
2000," writes's Andrew Kashdan,
keeping an eye on the insiders for us. "For
perspective, the net income of the entire company
was up only $106 million year-over-year. Why single
out Capital One when similar situations occur with
regularity in the corporate world? Well, the last
time we checked in with Capital One, we found the
coincidence of a large share-repurchase plan along
with executive options that would expire if the
stock price target was not met." (see: Life Has Its

*** "Twenty years of lousy returns doesn't change
anything," writes the steadfast John Myers, holding
firm to the belief that gold remains a worthy dollar
hedge. "After all, consider what the greenback had
going for it:

- Interest rates on long bonds that fell from 17% to
- A Cold War won by the United States.
- Oil supplies guaranteed for a decade after the war
with Iraq.
- A record-breaking bull market in stocks.
- One Asian debacle followed by another...almost
outdone by a euro mess.

Basically every good thing that could happen to the
dollar did. When people say, "'Things couldn't
possibly get any better,' they probably won't."

*** "We've been waiting a long time for this global
warming," joked my neighbor Patrick on Saturday
night. We were standing in front of an open fire in
the dining room, chatting about the favorite subject
of local conversation, the weather. It is unusually
cold and unusually wet in France this spring. Rivers
have overflowed, flooding towns in the north of the
country. In our area, the ground is so soggy, Mr.
Deshais has been unable to work in the garden for
the last couple of weeks. So he turned his attention
to animals. He brought in two dozen ducklings...and
put them in the chicken yard. He also set up a home-
made incubator and managed to hatch about 15 little

*** But at Saturday's dinner party, an obnoxious
guest seemed genuinely annoyed: "I don't understand
you Americans," he said to me, "you have all these
environmental groups and you seem to care about the
environment as much as anyone. But you still pollute
the atmosphere at twice the rate per person as in
Europe. And your president won't even consider
cutting back. We're all going to end up living on

*** He was referring to the use of fossil fuel and
how the added carbon dioxide in the atmosphere may
be boosting temperatures, causing a melt-down of the
polar ice caps. "Hold on," replied Patrick, a no-
nonsense farmer, "this global warming idea is just a
hypothesis... Besides, I like houseboats."

*** I returned from Madrid on Friday night. I had
hoped to give you some notes from the city, but I
had a very hard time connecting to the Internet -
and besides, I was there such a short time, I had
very little to report. All I could tell was that the
city is booming. Is Spain ready for a Daily
Reckoning? I don't know, dear reader, but I hope to
find out.

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"We Christians love to celebrate the resurrection,
but you cannot have a resurrection without a

Pere Marchand, in his Good Friday sermon

The 'Winter of Woe' is over. It is a new season. But
is the pain of lower stock prices and a slowing
economy really all behind us? Investors think so.
Analysts say so. The financial press has announced
the end of the non-recession and the resurrection of
the bull market. Today's letter takes a contrary

Since the vernal equinox, the stock market has shown
signs of new life. The Dow actually hit its most
recent 'bottom' on the last day of winter, March
21st. Since then, it is up 16%. The Nasdaq has risen
15%. The winter is over, investors tell themselves;
get ready for the warm summer: sun, baseball and

The weather may hard to forecast, but the seasons
are not. The earth's movements relative to the sun
are regular and cyclical. How nice it would be if
the seasons of greed and fear, boom and bust, comedy
and farce, were similarly predictable. You could
mark your calendar - 'buy' in March, 'sell' in

Episodes of greed are followed by episodes of fear.
But not as night follows day - regularly and
predictable, on a 24 hour cycle. Instead, in the
markets, one thing leads to another... as in love
affairs and traffic accidents... but you can never be
sure what will happen, or when.

The financial weather reports these last few weeks
have been encouraging. Stocks have risen on the news
that GDP is still positive, and consumers are still
borrowing and spending.

The "'new paradigm' optimism about the U.S. economy
remains very much intact," writes Dr. Kurt
Richebacher, "just as over-confidence in Mr.
Greenspan's ability to fine tune economic growth
does. Nor do we see signs of outright fear in the
marketplace. There is definitely no pessimism."

But, "let us take a closer look at consumer
spending," Dr. Richebacher urges. "From September
2000 through January 2001, real disposable income of
private households was just flat. Higher spending
had to be met by running down savings - that went
negative by about $70 billion."

Investors and analysts are delighted that, so far,
consumers have shown only a modest inclination to
cut back on spending. As mentioned above, the
savings rate rose only from minus 1% in February to
minus 0.8% in March - an improvement of only 2/10ths
of one percent. But Dr. Richebacher argues that
"there has been far more consumer retrenchment than
the aggregate figures seem to suggest."

"Real income growth has turned abysmal," he
explains. "Consumer price inflation ran at 4.4%
annual rate from December through February. Just to
maintain his spending, the consumer has to borrow at
the expense of saving."

And as also mentioned above, consumers are borrowing
more on credit cards - the most expensive form of
credit - a trend that cannot be sustained. The
consumer, Dr. Richebacher concludes, "appears close
to bankruptcy."

Dr. Richebacher compares the late '90s to the late

The two periods, he says, "share five unconventional
features: (1) a craze about a new technology;
(2)free rein by the Fed to uncontrolled credit
growth; (3) inordinate capital gains in a booming
stock market that encouraged and facilitated a
rampant consumer borrowing and spending binge; (4)
an effective, extraordinary surge in consumer
spending; and (5) a sharply higher participation of
the public in the booming stock market."

Of these, consumer borrowing and spending was the
most important element of the '27 to '29 bubble, Dr.
Richebacher maintains: "The overriding source of
growth since 1927 was consumer spending."
Installment sales began with automobiles and then
spread throughout the entire consumer sector. "By
1930, installment credit financed the sales of 60-
80% of all consumer durables," he says. "In short,
it was the invention of consumer credit that made
the boom of the 1920s so big."

In terms of consumer credit and spending, however,
the late '20s were no match for the late '90s. "The
excesses and imbalances of the 1990s are in every
respect many times worse than those in the 1920s.
Two facts illustrate: in the 1920s, the U.S. economy
had a sizable current account surplus, rather than a
huge deficit as it has today. And the savings rate
was not only a positive number, but a substantial

Dr. Richebacher sees the future in Newtonian terms.
Rather than cycles or seasons, he sees causes and

"Logic and Austrian theory suggest that the severity
of recessions is broadly proportionate to the
magnitude of the excesses and maladjustment that
developed during the boom."

"Accordingly," he perseveres, "the inevitable recoil
will be inherently be a lot worse.... The U.S.
economy is in the early stage of a recession that
will prove unusually severe and long."

Your correspondent,

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: May 07, 2001

Published By Tulips and Bears LLC