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Contributed by Bill Bonner
Publisher of: The Fleet Street Letter

MONDAY, 28 MAY 2001 


Today:  I, Greenspan...Part One

*** Dow and Nasdaq drop...home sales down

*** Slowdown worldwide...dollar up against euro and gold

*** Can the dollar stay up forever? Dead fish...and more

Market Watch 

To remind you, this section of the Daily Reckoning is 
written by Eric Fry, editor of Eric 
will also be the guest host on CNN-FN next week, 9:30 - 11 
E.S.T. My notes and letter follow, as usual.

From Eric: 

*** The promising economic shoots of the last few weeks now 
find themselves surrounded by the tares of a stubborn 

*** Weekly jobless claims jumped back above the 400,000 
mark, new home sales fell for the first time in three 
months, factory orders declined 5% and orders for 
semiconductors dropped an astonishing 31%.

*** Capping off the week's news, the government ratcheted 
down its first-quarter GDP estimate from 2% growth to a 
more-subdued 1.2%. In short, the US economy seems unlikely 
to produce the kind of earnings growth that Wall Street of 
late has begun to expect.

*** Maybe that's why the stock market sagged a bit last 
week. The Dow lost 117 points on Friday and 296 points for 
the week. This may be the year to follow the old adage: 
"sell in May, go away."

*** The hottest American export these days seems to be 
recession. Last week, the German Ifo business sentiment 
index fell to its lowest level in two years. "The news will 
heighten concern that the German economy is being affected 
by the US slowdown," the Financial Times surmised.

*** Not even a dismal US GDP report or a sell off on Wall 
Street seems to help the beleaguered euro these days. 
Europe's currency-by-committee fell -2.5% against the 
dollar last week amid reports of slowing German and French 
economic growth. The euro plunged to new lows for the year 
against all major currencies and trades very close to its 
all-time lows.

*** The euro is fast becoming the Chicago Cubs of 
currencies - often in the news, but never in the World 
Series. It's a dollar dynasty in this league, and everybody 
seems to want greenbacks.

*** The US dollar is another hot export. We can't seem to 
print greenbacks fast enough to meet demand. Other 
countries send us stuff to buy - wicker chairs, pinatas, 
Land Rovers and the like - we send them dollar bills. 
Before you know it, we've got a record trade deficit. A 
large and growing trade deficit, like a large and growing 
tree, is not the kind of thing that seems to bother too 
many people...unless it falls on their house.
Why should the trade deficit bother anybody? It's been 
putting down roots and growing at a healthy clip for many 
years, and still, the sun rises and sets every day on a 
prosperous nation.

The deficit is no problem, of course, as long as foreigners 
are happy to trade the stuff that they've got for the 
currency that we've got. If they change their minds, the 
dollar falls, probably the stock market falls and a 
Parisian vacation becomes tres cher. Don't lose any sleep 
over it, folks, but pay attention.

And a few notes from Bill:

*** Not only is the euro down, so is the dollar's other 
major competitor - gold. The yellow metal gave up $8 last 
week. Gold stocks declined an average of 8%. 

*** But TIPS (inflation adjusted treasury notes) are doing 
well. They've returned 6% so far this year.

*** Can the dollar stay up forever? Or will it fall up to 
30% as I [continue to] predict? I don't know, dear reader, 
but it would be a good idea to have some insurance - just 
in case.

*** "I'd like to see a copy of your son's senior thesis," 
wrote a DeaR reader. "I want to see what you got for your 
$100,000." I have not read Will's paper, but I suspect that 
investing in education is no different from other 
investments. You begin with money and no knowledge. You end 
up with knowledge and no money.

*** It was a warm, sunny weekend out at Ouzilly. Taking a 
stroll around the pond, we enjoyed the sweet perfume of 
chestnut and locust trees in full bloom. But along the 
shore of the pond we counted at least 20 dead fish. A heron 
is apparently diving in the water and killing them...only 
to discover that they are too big to carry off.

* * * * * * * * * * * Advertisement * * * * * * * * *

The landing approach has begun. 

The flaps are down. A moderate slowdown has hit the U.S. 
economy. Investors are still optimistic. But consumer 
spending is way off. seems that everyone believes that Alan Greenspan 
will engineer a soft landing for the formerly high-flying 
tech bubble. But according to one of the world's
leading economists, it's worse than blind faith. It's 
"high-octane 'new paradigm' propaganda." 

Here's what you need to do - right now - to prepare 
yourself for the current crisis:
* * * * * * * * * * * * * * * * * * * * * * * * * * * 

I, Greenspan ... Part One

"The primary mission of Fed policy this spring," says a 
column in the Financial Times, "is to prevent the capital 
spending slump from having serious spillover effects on 
personal consumption through job losses and wealth 
destruction in the equity market."

The world's financial press has realized what you and I saw 
months ago (thanks to Dr. Kurt Richebacher): This is no 
ordinary inventory correction. It is more like the busts of 
the 19th century...or maybe even the period leading up to the 
Great Depression of the 1930s. It is caused by a collapse 
of capital spending and cannot be readily reversed by 
interest rate cuts... 

"The severe and protracted recessions that regularly defy 
monetary easing for a prolonged period," observes Dr. 
Richebacher, "are invariably the upshot of a prior, 
pervasive 'bubble economy' - the age-old phenomenon in 
which soaring asset prices stoke borrowing and spending 
binges in investment and consumption that burst once asset 
prices decline. 

"It has been labeled a 'post-bubble recession,' in contrast 
to the garden variety inventory recession. The distinction 
is vital. There is no question that the current U.S. 
economic downturn belongs to the 'post-bubble' type. 
Measured by the phenomenal extent of the prior borrowing 
and spending excesses, it has been the greatest bubble in 

The type of downturn we are looking at, Dr. Richebacher 
explains, is "by nature akin to the U.S. Depression of the 
1930s and Japan's current prolonged recession...the official 
data do not allow any doubt that the present U.S. downturn 
belongs to the latter, very dangerous type."

Spending on new technology soared in the last half of the 
last decade of the last century. At the beginning of the 
decade, each year saw about only about $3 billion per year 
of tech IPOs. But by the end of the ten years, this number 
had increased 1200%. Both individuals and businesses were 
sure that the new technology would pay off big. 

This was not a new phenomenon. It happened several times in 
the 19th century - when investors became excited about the 
possibilities offered by the railroads and the industrial 
revolution. Then, again, in the late 1920s, it was 
electrical appliances and automobiles that caught 
investors' fancy. In both cases, the technology proved 
hugely successful, but it took years of booms and busts in 
the capital markets before accounts were settled and 
investors (or, often, their heirs) finally got what they 

Markets eventually sort things out. In the free give and 
take of the marketplace, people get, more or less, what 
they've got coming. Fear, greed, stupidity, patience, self-
discipline, hard work, independent thinking - human 
strengths and weaknesses are rewarded or punished as the 
case may be. And if the results seem unfair, who are we to 
argue with them?

But the world of politics is different. The operating 
principle is different - free give and take is replaced 
with assault and battery. And the results are different 
too. Nothing quite works out as promised...and almost no one 
gets what he deserves. Scalawags and mountebanks get public 
adulation, while honest citizens are robbed, bossed around, 
and from time to time, killed.

Governments promise voters the sun, the moon and the stars 
- that is, things that are out of reach...such as gain 
without pain...progress without savings...boom without 
bust. What they actually deliver up is something different. 
For even they are subject to the laws of nature...and nature 
always gets her price. (More about this tomorrow...)

But today's letter is not written to complain about 
politics. Instead, it merely offers a modest prediction: 
the sun, moon and stars will stay where they are. Even the 
most revered bureaucrat since Dwight Eisenhower will not be 
able to lure them from the heavens.

Have the tech investors of '98 - '01 gotten what they 
deserve? Certainly, some have. Investors in the 
sector have been nearly wiped out. For example, anyone 
foolish enough to invest in Microstrategy, the "data 
mining" firm, near its peak, now has little more than a 
hole in the ground. The stock traded above $300 a share for 
a brief period. 

Today, shares are approaching zero.

But most investors seem to be in relatively good shape. The 
stock market, worth 180% of GDP at its peak, is still worth 
140% of GDP - far above its long term average. The Dow 
remains only a few hundred points below an all-time high. 
Dow investors have, so far, enjoyed nearly two decades of 
gain, with very little pain. Until recently, they have 
realized annual profit growth of 18% per year...a level more 
than twice the average. And the 'greatest bubble in 
history' has, so far, been followed by one of the least 
impressive economic downturns. 

Is that all there is?

Investors hope so. And they are pinning their hopes on Alan 
Greenspan. Armed with the powers given to him by the 
Federal government, Greenspan - it is hoped - will make 
sure investors never get what they've got coming... Using 
some magic that has yet to be explained, he is supposed to 
guarantee that their return on investment will remain far 
above what markets typically allow, not just for 20 years, 
but forever.

While capital spending has collapsed, consumer spending has 
fallen off gently. "In light of the relentless carnage in 
the stock market and virtual stagnation in real disposable 
personal income, consumer spending has held up amazingly 
well," reports Dr. Richebacher. "A resilient consumer is 
the great hope of those who are still venturing that a U.S. 
recession may be avoided." 

Two-thirds of the economy is consumer spending. To succeed, 
Mr. Greenspan must prevent the illness in the capital 
spending from infecting the consumer. Can he?

More tomorrow...

Bill Bonner

Your man on the scene in sunny Paris...across from the Le 
Paradis cafe...where you always get what you deserve...even 
if you didn't order it.

* * * * * * * * * * * Advertisement * * * * * * * * *

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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 28, 2001

Published By Tulips and Bears LLC