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Contributed by Bill Bonner
Publisher of: The Fleet Street Letter

TUESDAY, 22 MAY 2001 


Today:  Will the Fed Succeed?

*** The Nasdaq is back...Cisco up 13%...Party time on Wall 

*** Nasdaq up 41% since low - are tech investors getting 
even? Not quite...

*** Score one for the Blue mother nature 
settles her accounts...a darned cheap hotel chain...and 

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*** The Nasdaq is back! The index punctuated its fifth 
straight winning session with a 106-point advance. The Dow 
edged ahead a modest 36 points, as if to avoid stealing the 

*** Typifying the Nasdaq rally, Cisco Systems attracted 
many admirers yesterday...just like old times. Investors, as 
if unable to tame their desires, had another fling with 
their former tech darling. Although lacking some of that 
youthful passion, the tryst was enrapturing nonetheless, as 
the stock soared more than 13% on the day.

*** It's party time on Wall Street. "Fed's welcome wagon is 
stocked with lots of bottles of champagne," writes Ed 
Yardeni, "and the speculators are drinking the liquidity 
with gusto. The bubbly is bringing back irrational 
exuberance fast."

*** "One the best things about working on Wall Street are 
the 'launch parties,'"'s Eric J. Fry 
relates. "Last week, Krispy Kreme moved from NASDAQ to the 
Big Board, and to celebrate its matriculation into the 
highest echelon of stock trading, sponsored a launch party 
in front of the New York Stock Exchange. The 'party' 
occurred under a block-long tent on Broad Street where 
legions of smiling Krispy Kreme employees dispensed fresh 
donuts and coffee to everyone who passed by. 

"Although utterly irrelevant to the investment process, 
launch parties have become de rigeur for any company 
listing on the exchange. Krispy Kreme claims to have given 
away 40,000 doughnuts in all. Mine was delicious."

*** "Just how have speculative stocks been?" the Wall 
Street Journal asks. "The most speculative technology 
stocks rose 48.2% between April 4, when the NASDAQ 
Composite Index bottomed, and last Monday (May 14), 
according to numbers crunched by AQR Capital Management. 
The firm found that more-pedestrian tech names - those 
trading at less than 50 times their trailing 12-month 
earnings - were up 29.8% during the period, while non-tech 
stocks in the index returned 9.9%."

*** The Nasdaq has now rebounded 41% from its April 4th 
low, while Cisco has soared an even more impressive 67%. 
One might imagine therefore, that both Cisco and the tech-
laced index to which it belongs have nearly reclaimed their 
all-time highs. Not quite. Cisco has recouped barely one 
quarter of its record-high valuation. The Nasdaq has 
reclaimed less than half of its record levels.

*** In any given year, the stock market is more likely to 
go up than down. Why not just stay in stocks, buy the 
indexes, and forget about timing and stock selection? Would 
Mr. Market reward such a simpleminded approach? Would 
Mother Nature design a world in which the pleasure of 
rising stock prices always surpasses the pain of falling 

*** The Wall Street Journal provides an answer. In a story 
entitled, "Doing the Math: Tech Investors' Road to Recovery 
is Long," the Journal provided a long-overdue public 
service by explaining the widely misunderstood mathematical 
truth that recovering from a large loss requires large 
gains...very large gains.

*** For example, the Journal cites the Pro-Funds UltraOTC 
Fund, which fell a stunning 94.7% between March 2000 and 
the April 4th NASDAQ low. Since then, the fund has risen by 
a slightly greater percentage - 95.6%. "But at that point, 
an initial $10,000 was valued at just $1,035, still down 
89.7% from its March 2000 level. To return to one's 
original stake after a 95% tumble requires a 1,900% gain." 
Yes, stocks usually go up...but when they fall the pain is 
especially sharp and deep. 

*** And when stocks fall, newly impoverished novice 
investors seek to relieve the pain...pulling up to Wall 
Street curbs with lawyers-in-tow... USA Today introduced us 
to Cynthia McNamara who alleges that she lost $632,000 
because her Merrill Lynch broker concentrated her assets in 
tech stocks and borrowed money on margin to make purchases. 
Cynthia tells USA Today, "If you had asked me what margin 
was a year ago I didn't know. Now I know, but everything is 
gone." Information is cheap. Knowledge is dear.

*** Stephen Roach, the bearish chief economist at Morgan 
Stanley Dean Witter & Co. remains unconvinced that the Fed 
rate cuts will prevent recession. "We went to excess in the 
late 1990s are many counts - investing in information 
technology, depleting personal savings, relying on foreign 
capital - and the overarching excess, the stock market 
bubble, capped off by the NASDAQ folly. At some point, you 
purge the excesses and revert to the norms, and that is 
generally triggered by recession."

*** Gold yielded a little ground yesterday by "giving back" 
$2.00. However, most gold stocks finished on the plus side. 
Gold bottomed out at 255 (June contracts) on April 2nd. 
Since then, it has gained $37. 

*** Remember Michael Martin? We quoted him in the Daily 
Reckoning as saying, "It wouldn't surprise me to see gold 
jump out of here, up $15 to $20 in a single day." Fresh 
from his prescient call, we just had to check back in with 
Mike to see if he wanted to tempt fate with a follow-up 

*** "The best rally in two years leaves me paralyzed," he 
says. "After 20 years of watching these rallies get snuffed 
out, I think caution is warranted short-term. But if you 
will allow me to hedge, I remain convinced that gold is in 
the process of beginning a long-term turnaround to the 
upside. I can safely predict, however, that it's not going 
to happen in one day."

*** The Blue Team has only been in business for a few 
weeks, but it already has a big win in its gold share 
recommendation. Franco Nevada is up 20%... Dover Corp., 
while not a gold, is up 11%... (For more on the DR Blue see:

*** No more Mickey Mouse investments for Warren Buffett. 
His Berkshire Hathaway sold the last of its Disney stock 
during the first quarter. Other notable recent sales by the 
sage of Omaha include Citigroup, Freddie Mac and General 

*** While I was in Santa Fe, I stayed at Marriott's 
Residence Inn. The accommodation was more like an 
efficiency apartment than a hotel room, designed for 
longer-term guests. Grants recently reviewed, favorably, a 
competitor in the extended stay market: Innkeepers U.S.A. 
or, to be more precise, Innkeepers U.S.A. Trust (KPA) an 
REIT. The company has 67 hotels, with 8,131 suites. It 
appears to be a good business, but the REIT, selling at a 
recent price of $10.26 per share, yields a dividend of an 
extraordinary 11.7%. 'There must be a reason why this REIT 
is so cheap,' I can almost hear you saying, dear reader. 
The thought occurred to me too. It turns out that 28% of 
the company's revenue comes from properties in Silicon 

*** Could the flood of income from Silicon Valley turn into 
a trickle this year or next? Yes, it could. But Sheila 
Stoltz, a fund manager with a stake in the company says 
"the thing about Innkeepers that's particularly attractive 
is that they have a very strong balance sheet and they have 
a very high dividend, and a dividend that is easily 

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I must have left you sitting on the edge of your chair, 
dear reader.

Last Thursday's letter ended with a couple of provocative 
question marks: will Alan Greenspan become the most 
successful government employee since WWII? 

Will the Fed, which has debased the currency it was 
supposed to protect, now turn out to be the savior of the 
economy it is supposed to ignore?

The Federal Reserve System was chartered to protect the 
nation's money. This it has failed to do. Instead, it has 
acted like a security guard gone bad...sharing out the 
nation's savings - rewarding debtors, bankers and 
bureaucrats at the expense of savers, pensioners and 
bondholders. It is robbery. But it is more subtle than 
taxation and it pays a lot better than sticking up cab 

Fed officials don't even have to worry about hailing cabs. 
They have a fleet of limousines to cart them from one 
price-rigging meeting to the next. Still, Fed officials 
were not satisfied with their lot.

Nowhere in the Federal Reserve enabling legislation is 
there any mention of a "chicken in every pot." Nor is there 
any discussion of "protecting Wall Street's commissions;" 
nor of "bailing out underwater businesses;" nor of 
"stimulating consumers to buy;" nor of "helping Americans 
go further into debt;" nor of "re-inflating leaky bubbles." 

Yet, those are the things the Fed now aims to do. Without 
ever taking white-out and pen to its public mission 
statement, nor appealing to Congress for authorization, the 
Federal Reserve System, under the management of former-
Randite, goldbug Alan Greenspan, has expanded its mandate. 

The dollar appears stable. Remarkably, against its main 
competitors, it has barely budged in the last six months. 
During that same time, consumer price inflation has risen - 
with energy costs hitting new highs and home prices rising 
as much as 1% per month in some areas. Gold, which 
unreliably clocks the pace of the dollar's decline, has 
risen 14% against the greenback since April 2nd. 

It's not as if short term rates were unacceptably high at 
the end of last year. At 6%, subtracting the rate of 
consumer inflation, 3%, yielded a net real rate of return 
of 3% - about what real rates of return have averaged 
throughout the last century. 

Still, rather than raise rates to head off what appears to 
be an increasing risk of inflation, Mr. Greenspan chose to 
lower them. Not gently. Not tentatively nor cautiously - 
but dramatically and aggressively.

Mr. Greenspan's new focus may be found, according to Martin 
Wolf of the Financial Times, in the words he uses in his 
appearances before Congress. In his most recent three 
presentations, the guardian of the nation's currency 
discussed money and credit not a single time. But he 
"mentioned productivity 42 times," remarks Wolf.

Thus I come to the point of today's letter which - I hope 
you won't be disappointed - is yet another question: Does 
this expanded new role of the Fed's presage a period of 
even greater neglect of its old one? 

And another question: Is the dollar destined to fall - 
perhaps even in our lifetimes - at a faster rate, now that 
the Fed is no longer even pretending to protect it?
To this latter question I offer a helpful response: I don't 
know. But it seems like the sort of thing a prudent 
investor might want to protect himself against. 

"The clear and present danger," writes James Grant, "is 
that the chairman, being mortal, will miscalculate. It has 
happened before. Perhaps, he...has underestimated the 
strength and the persistence of domestic inflation. 

"Perhaps, by overstimulating, the Fed will push bond yields 
and mortgage rates higher. Possibly, by perpetuating a 
belief in the Federal Reserve's capacity to control 
essentially uncontrollable events, Greenspan will embolden 
American investors and precipitate even greater market 

"The risk," says Albert Friedberg, of Friedburg 
Mercantile Group, "is that external and internal inflation 
will begin eating away money, savings. There is an attack 
on both sides: the internal attack is already on, with the 
inflation rate in the U.S. creeping upwards and upwards, 
and the U.S. has been lucky because the dollar was strong 
and the dollar held down imported inflation. When the dollar 
now begins to weaken, I think that we will begin to see 
inflation get a little worse because external inflation 
will come in. You won't want to sit through the dollar 
declining 15% or 20%, which is likely to happen in our 

Ian Campbell, writing for UPI, puts the risk a little 
higher. "Only the consumer," he writes, "with cheap 
mortgage in pocket and array of credit cards in his hand, 
is keeping the economy going. Perhaps someone should tell 
him now is not the time to overspend. This is a crossroads 
for the world economy. The U.S. economy is going to head 
down further. And when the markets see evidence of that the 
Dow will fall again. In the next few weeks the euro is 
vulnerable to losing 3 more cents. In coming months the 
dollar could lose 30 cents."

Neither gold, nor euro bonds, nor inflation-adjusted 
treasury notes (TIPS) have been the greatest investments 
over the last few years. Perhaps they will not be the 
greatest over the next few years either. But I doubt they 
will be the worst.

Bill Bonner
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 22, 2001

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