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Contributed by Bill Bonner
Publisher of: The Fleet Street Letter

THURSDAY, 24 MAY 2001 


Today:  Ascension Day

*** Nasdaq takes a bullet... A lucky shot? Or is Mr. Bear 
planning to attack?

*** Is he a demoblican or a republicrat? Does it make any 

*** Why trust in God when you have lawyers?... Dell 
overheats... and more...

I asked my friend, Eric Fry, to begin writing the market 
notes. Eric, editor of, has his office 
on Wall Street and watches the markets more closely than I 
do. Eric will also be the guest host on CNN-FN next week, 
9:30 - 11 E.S.T. You'll see my letter, below, as usual.

From Eric: 

*** The new and improved, post-bubble Nasdaq isn't 
bulletproof after all. After six straight days of gains, 
the index finally took one between the eyes, falling more 
than 70 points. The Dow also staggered a bit, falling 151 

*** The real reason for the decline is anybody's guess. 
Probably folks just decided to take a break from buying 
stocks for one day to go on a picnic or to fly a kite. But, 
according to the mouths on TV, politics is to blame. It 
seems that Sen. James M. Jeffords, a Vermont Republican, is 
toying with switching parties to join up with the Democrats 
because of disputes with the White House. This would give 
the Democratic Party a clear 51-to-49 majority in the 
Senate. Jeffords will let us know in which trough he 
feeds sometime today.

*** Another reason for yesterday's sell-off may be that 
business across the board just isn't very good. Fred Hickey 
observes, "Ingram Micro, the world's leading distributor of 
computer and networking products ($30 billion annually) 
held their quarterly conference call with analysts this 
week. CEO Kent Foster stated in no uncertain terms: "We see 
no evidence at all of a turnaround." 

*** "According to Gartner Dataquest, U.S. PC unit sales 
fell 3.5% in Q1, the first quarterly sales decline since 
they started keeping records."

*** The Fed surveys "professional forecasters" to see where 
they think the economy is headed. The soothsayers have 
lowered their forecast for economic growth this year, says 
the Philadephia Fed, from 2.2% to 1.2%.

*** Profits are headed down, too. High inventories and 
excess capacity prevent them from raising prices...while 
energy costs and a high dollar squeeze out profits. In the 
first quarter of this year, profits were only half that of 
the year before. 

*** Washington Post columnist Fred Barbash takes the grim 
numbers at face value. "The last I heard, profits were 
tanking almost across the board as far as the eye could 
see, especially in technology," a puzzled Barbash writes in 
the International Herald Tribune. "Chief executives were 
complaining of a lack of 'visibility' as they handed out 
earnings warnings." Although Barbash acknowledges the 
presumed effect of 5 straight rate cuts and understands the 
theory "that the market anticipates an economic turnaround 
even before things turnaround," he is skeptical that 
nothing but clear skies lie ahead. So are we.

*** The clear-sailing crowd will not be troubled in the 
least that the US current account now plumbs record 
deficits. At 4.6% of GDP, the current account deficit 
exceeds the levels that our 1980s investor forebears found 
so alarming. "For perspective," James Grant observes, "the 
deficit peaked a 3.5% of GDP in the mid-1980s, a foreign 
exchange era best remembered for the dollar bear market 
that preceded a famous stock-market panic."

*** The palpable, although perhaps not imminent, risk of 
the current account undermining the dollar's value prompts 
Jim Grant to wonder, "What are the risks to a natural owner 
of dollars of choosing to own nothing but dollars?" Grant 
provides an implicit answer to his rhetorical question by 
contrasting today's US dollar with 1970s-era Swiss franc. 

*** "A quarter-century ago, the Swiss offered protection 
against the ravages of price inflation. Today, the dollar 
provides exposure to the sweets of asset inflation. A 
quarter-century ago, the mythology of the Swiss gnomes lent 
value to the franc. Today, the vaunted reputation of Alan 
Greenspan enhances the value of the dollar. In the early 
1970s, the Swiss Government charged negative interest rates 
to dissuade nonresident speculators from holding francs. In 
2001, the Federal Reserve is chipping away at the funds 
rate, but not with the object of discouraging monetary 
inflows; on the contrary, the current account deficit (and 
the world's willingness to finance it) is at the heart of 
the American system."

*** More on the dollar, Alan Greenspan and life in the 21st 

*** An early snow-melt looks likely to boost hydro-electric 
power production in the Northwest, thereby alleviating the 
California crisis...temporarily. Dennis Gartman predicts: 
"The media this week will be filled with news of collapsing 
energy prices in the West...[But] more, not fewer, rolling 
blackouts will take place in California as the summer 
progresses, for the hoped for benefits of renewed hydro-
power will prove modest and temporary."

*** "The snow pack is approximately 58% of the 100-year 
average in the Northwest..." Gartman continues. "Once the 
market realizes that the reservoir elevations are not where 
they normally are at the onset of summer [and] that the 
snow melt has stopped in early July as opposed to the end 
of August...prices will resume upwards again and rolling 
blackouts will resume."

*** Why trust in God to fill the reservoirs when you have 
lawyers on staff? The Wall Street Journal reports, 
"California's two top-ranking Democratic state lawmakers 
sued the Federal Energy Regulation Commission (FERC) 
force the FERC to cap wholesale electric power." If 
Greenspan can establish a "just and reasonable" interest 
rate for the entire economy, how come FERC can't pick the 
right electricity rate for a state with only 30 million 

*** Maybe tech is getting a little too hot. Yesterday, my 
office received an "Important Safety Recall Notice" from 
Dell Computer notifying us that Dell is recalling "certain 
batteries" that power certain kinds of Dell laptops. It 
seems that the defective batteries "are subject to 
overcharge, potentially causing them to overheat, release 
smoke and possibly catch fire."

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You may recall Mr. Goupil? 

Weeks after we bought our house in France, Mr. Goupil 
arrived at the front door. A short, stout man with a round 
face and bright blue eyes, he informed us that he was our 
plasterer, by right of birth. His father, his uncle and his 
father's father had done the plaster work on the Chateau 
d'Ouzilly. He would continue to do so...and we would 
continue to pay him.

Mr. Goupil's vision of how the world should work is a 
peculiar combination of red and purple... Everyone has his 
place, his duties and his responsibilities in Mr. Goupil's 
cosmology...but they may be assigned by the State or by 
God. He is a God-fearing communist, I believe, sure that 
everything should be carefully organized and not 
particularly concerned about who does it...

I mention Mr. Goupil because the euro fell again yesterday. 
In fact, it dropped below 86 cents - bringing it closer to 
its record low. This decline comes at a most unlikely time 
- that is, just days after a record jump in the U.S. trade 
deficit and the most recent of 5 rate cuts by the 
custodians of the dollar. Neither theory nor experience 
provides an explanation.

"Here we have an economy that is running a current account 
deficit of 4% a year," writes Larry Elliott in the British 
on-line publication, the Guardian Unlimited. "It is one 
that has an overvalued currency and one where the corporate 
sector is showing all the classic signs of distress: 
falling profitability, cutting investment and laying off 
staff. It is an economy dependent on constant flows of hot 
money but which also gives investors the absolute right to 
leave with their money whenever they want. Faced with a 
similar set of circumstances in Thailand, dealers could not 
get out fast enough."

"The rise in the dollar since February has been puzzling", 
says Elliott, quoting the Bank of England, "as it has been 
associated with falls in US growth forecasts and short-term 
interest rate expectations relative to some of its major 
trading partners". Elliott translates: "all our models say 
the dollar should be falling like a stone but for some 
reason it is going up." 

One of the wonders of the modern world is the dollar. The 
US is not Thailand and the dollar is not the baht... But 
like the baht, the dollar is paper... backed by 
nothing...and minded only by an organization - the Federal 
Reserve System - whose motives are suspect and whose 
competence is doubtful.

But, as Elliot tells us, "the herd mentality is powerful 
and, at the moment, the herd believes that Alan Greenspan 
has the situation under control, or at least pretends that 
it does."

Does he? 

One feels like a fool for merely asking the question. How 
could a single mortal control an entire global economy...
involving billions of people making billions of decisions 
every day? Perhaps he is not mortal, after all.

No mortal man - even a former Randite - could stand in the 
way of fundamental economic re-adjustments...or the re-
balancing of the yin and yang of nature itself. 

"We are now in the midst of a capital goods recession," 
writes Marshall Auerback, "capital expenditure, 
particularly in high tech, is in sharp decline. It is 
falling from an unprecedented lofty peak. It is being 
slowed down by the sheer burden of debt and the consequent 
inability to service that debt as saturation dynamics take 
hold. We have not seen anything approximating this 
condition in the US economy since the 1930s. The most 
comparable post-war situation is the bubble economy of 
Japan in the 1980s, during which a capital expenditure boom 
(also fuelled primarily by debt) reached an unprecedented 
25 percent of GDP at its peak.

"The Japanese analogy is also instructive in many other 
ways. In the aftermath of such excesses, the unwinding 
generally persists for a long time and proves surprisingly 
impervious to repeated interest rate cuts."

Cutting rates and debasing the currency are the only tools 
Mr. Greenspan has. Will they be enough to fix what 
economist Anirvan Banerji of the Economic Cycle Research 
Institute describes as "the the worst global cyclical 
outlook in 20 years?" Can Greenspan hold back the cycles of 
commerce and investment...greed and fear...expansion and 
contraction...that have marked human action since the 
beginning of time? 

The Fed's record of protecting the dollar's value is 
pathetic. Nor is the history of managed currencies free 
from sturm und drang. In fact, Elliott makes the point that 
there have been twice as many financial crises since 1973, 
when gold was removed from the international monetary 
system, than before. 

Still, who am I to argue with the market? The dollar is up. 
But Mr. Goupil gave me a clue as to why the dollar has held 
up so well against the euro recently.

"I'm sorry I am so far behind schedule," he replied to an 
obvious question. "But all of a sudden everyone has work 
they want me to do. Mr. Morrant, for example. I know he's 
been planning to redo his kitchen for at least 10 years. 
Now, he wants to do it right away. I told him I couldn't do 
it until next year. So, he asked me if he could pay me for 
it now..."

"What's going on?" I asked.

"Everyone wants to get rid of francs before we have to 
switch next January... You know, if you try to exchange 
more than a certain amount, they're going to ask where you 
got them. And a lot of people don't want to have to answer 
that question..."

It is a funny old world, as Maggie Thatcher put it. For 
now, the dollar's value rests on hot money...'dirty' 
money...and an absurd faith in the chairman of the Federal 
Reserve. But come January, the 'dirty' money in Europe 
should all have been laundered - thanks to Mr. Goupil and 
the world currency markets. The hot money may well have 
cooled off towards the dollar. And Mr. Greenspan's control 
over the world financial system may no longer be in 
question. Most likely, it will be clear by then that the 
Fed Chairman was mortal after all.

Bill Bonner,

On my way back to Paris...

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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 24, 2001

Published By Tulips and Bears LLC