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Contributed by Bill Bonner
Publisher of: The Fleet Street Letter



Today:  Debt Express

*** Inflation is no problem?

*** Sunset in Europe? False dawn in America? 

*** Pigs, chickens and deformed ducks...

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*** Last week Dallas Fed chief McTeer proclaimed that the 
stock market correction was "overdone." Yesterday, Chairman 
Greenspan assured the nation, "Inflation is not a 
significant problem at this moment [and] there is also very 
little in the way of short-term inflationary expectations."

*** It is certainly comforting to know that our economic 
woes are now behind us. Now that everything is settled, we 
can get back to buying stocks.

*** Maybe inflation is not a "significant problem," but he 
can be a nuisance. And like an ill-mannered guest who 
leaves beer cans in the planter boxes, he can make a mess 
of things:
o Most commodity indices have been heating up since late 
o "Resource currencies" like the Australian dollar and 
the Canadian dollar have been rallying of late.
o Long-term bond yields have been rising ever since the 
Fed began cutting rates in January.
o Until very recently, inflation-indexed Treasury bonds 
have been outpacing conventional bonds for months, 
suggesting that Mr. Market worries somewhat about resurgent 
o Even Old Man Gold rose from his rocking chair to 
stretch his legs for a spell before returning to the chair 
for another long nap.

*** And what of the Consumer Price Index itself? If it were 
a common stock, momentum investors would take one look at 
the CPI's upwardly trending price graph and start buying. 

*** The revelation from on high that the inflation problem 
is behind us boosted the Dow 71 points to 11,061 - once 
again clearing the 11,000 mark. The Nasdaq managed only a 
six-point gain.

*** "It is the responsibility of economists to point out 
false dawns," writes CLSA economist Eric Fishwick, who does 
not see the sun rising on this economy just yet. Consumer 
spending will be a critical component of any sustainable 
upturn, he says. However, "in real terms, retail sales have 
stopped growing [and] they are not yet contracting, which 
has happened in previous cycles."

*** Meanwhile, the sun appears to be setting in the Old 
World. Business confidence is weakening across Europe - 
from Sweden to Germany to Spain.
"French manufacturers were more pessimistic in May then at 
any time in almost two years as domestic and foreign orders 
dropped," the International Herald Tribune reported late 
last week. The index of business confidence, as compiled by 
French statistics office INSEE, has dropped six months in a 
row. As Deutsche Bank economist David Naude told the IHT, 
"This is clearly a cold shower after they slightly crazy 
idea that France could escape the international slowdown."

*** Inflation has risen in Europe, unemployment is up too. 
Economic growth, on the other hand, is down. 
America.faces the prospect of a recession. And Europe, like 
America, turns its weary eyes to Alan Greenspan, the one 
man who might rescue the situation. Bill has more, below...

*** The euro declined 8% in May - because of the weakening 
economic picture in Europe, it is believed. It now stands 
just a bit over 84 cents. 

*** Part of the problem - or advantage, depending on the 
way you look at it - in Europe may be that Europeans just 
don't work enough. Richard Russell sites an OECD study 
showing that Americans work far more hours than than Old 
World counterparts. In 1970, for example, Germans and 
Americans each worked an average of about 1900 hours per 
year. But last year, Americans worked nearly 2,000 hours, 
while Germans put in only 1700.

*** But who's better off ? People who work less and save 
more ? Or those who work harder and harder to get 
themselves further into debt ? You decide.

*** Have you read the "Technology and Health" page in the 
"B- section" of the Wall Street Journal lately? It has 
become a kind of obituary page for technology companies. 
Last Friday, page B2 reported that Tellabs struggles from 
"worsening industry conditions," Hewlett-Packard's suffers 
falling revenue from falling "worldwide sales of computer 
servers" and Ibis Technology "cut its staff 14%."

*** Investors looking for a rapid turnaround in the 
technology industry might want to take note of the latest 
GDP report from Taiwan. The tech-heavy Asian economies 
first-quarter report was its lowest in 26 years. Dante's 
Inferno seems to anticipate tech stock investing in 2001: 
"This way for eternal suffering. This way to join the lost 
people...Abandon all hope, you who enter!"

*** According to a new study by two professors at the 
University of Chicago, only 5% of analysts ever issue a 
sell signal. J.P. Morgan analyst Michael Freudenstein must 
be one of the few. He warned investors last Thursday to 
think twice before buying the stock of either Merrill Lynch 
or Goldman Sachs. The problem, as he sees it, is a 
"continuing decline in investment banking activity."

*** He didn't mention his employer. But, investment banking 
produces 60% of J.P. Morgan's operating earnings. 
Furthermore, as's Andy Kashdan and 
Robert Tracy point out, Morgan's investment banking 
revenues fell 22% year-over-year in the first-quarter.

*** "If one were to build a banking behemoth from scratch 
with the idea of maximizing exposure to a weakening economy 
and struggling capital markets," they write, "the finished 
product would bear a striking resemblance to J.P. Morgan 

Eric Fry

And more notes of a less serious nature...

*** It was so beautiful in the country this weekend, it was 
hard to leave. Pierre had cut the hay in the field behind 
the house and rolled it into giant bales. Squint, and it 
looks just like a painting by van Gogh. 

*** Young animals of all species are adorable. We have baby 
ducks, turkeys and chickens. One of the little ducklings 
hatched with a bad foot. The poor thing hops and scuttles 
around. "I should probably put him out of his misery," Mr. 
Deshais had remarked last week. Somehow, the duckling 
survived - at least while it was enclosed in a protected 
space. But now it is out in the fowl yard with about 30 
other ducks, none of whom have ever heard the parable of 
the Good Samaritan nor ever seen a handicap parking space. 
The deformed duckling was still alive when we left last 
night. But nature will take her course.

There are also four little pigs in the sty. We bought them 
at a neighbor's farm just after they were old enough to be 
separated from their mother. They were cute, too, rooting 
around in the yard. Of course, adult animals can be 
attractive too, with the right sauce.

*** Pierre spent Sunday afternoon fixing his hay rake. 
"Every year it is the same thing," he told me. "I drive 
along; then I hear a clacking noise. It is not too bad at 
first, so I wait. But it gets worse and worse. Then, by the 
time I decide to stop the tractor and check, the noise 
ceases. So, I don't worry about it... Of course, then I 
notice that the rake isn't working. The noise stopped 
because the piece finally broke I then have to 
search for it in the hay."

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"We may make Atlanta, but we'll all be dead."
One of Jimmy Rogers' railroading songs

Clickety clack. Clickety clack.

There is always a lot of 'noise' in an economy. The latest 
figures, for example, show such a mixture of facts and 
figures that it is hard to make sense of them. 

Corporations are issuing bonds at a record pace. $88 
billion of them were taken up by investors in the month of 
May alone. And, in early May the junk bond market had its 
best week in 12 months, with $500 million flowing into the 
risky investments. 

Consumers seem to be heeding McTeer's appeal to patriotism. 
Countrywide Credit reports that it funded $102 billion of 
new mortgage loans in the month of April - and increase of 
130% over a year ago. And Mercedes Benz reported its best 
results ever in the month of May. 

And there is the gold price. Down $9 last week, gold seems 
to be telling us that inflation is, as our Fed chief tells 
us, no problem. Gold stocks were less sure - declining only 
5% over the week.

Meanwhile, the number of bankruptcies rose 17% in the first 
quarter. So far this year, 581,105 people have declared 
bankruptcy...up 23% from this period last year. What should 
you make of that?

With all this racket, how will we know when the economy is 
really breaking down? 

It is hard enough to see what is in front of our very eyes, 
let alone what is coming around the bend. Is the economy 
expanding or contracting? No one really knows. We have to 
wait to find out, looking backward to see where we have 

We don't know where we are, but most people believe they 
know where they are going - towards the clear skies of 
economic growth, full employment and 15% per year stock 
market growth. No need to consult a map, nor even to look 
out the window; Alan Greenspan is at the throttle. He's 
wearing his Casey Jones cap and has his hands on the 

As we found out yesterday, the throttle may not be 
connected to the fuel line...and the brake may be more 
operational in theory than in fact...but there is no need 
to alarm the passengers. This train is bound for glory, 
after all. Get on board now...or you'll be left behind!

"With effortless adjustments to short-term interest rates, 
so the thinking goes," as Doug Noland put it in a recent 
bulletin, "central bankers have both the skill and capacity 
to orchestrate positive and enduring effects to financial 
markets, while stimulating just the right amount of 
additional demand to perpetuate a non-inflationary U.S. 
economic boom. With the Fed able and more than willing to 
ward off any financial difficulty or economic slowdown, the 
only thing to fear is fear itself."

It is too late for business. Already fearful, business is 
cutting back. Employees are being laid off. New projects 
are being shelved - at least until excess inventories are 
sold off. 

Thank God for the consumer. "With industry already in a 
slump," explains an article at S.F. Gate, "the only thing 
that that has kept the nation out of recession has been the 
willingness of consumers to dig into their pockets and buy. 
That spending has been fueled by an ever-increasing use of 

Borrow, borrow, borrow, urges the Fed's McTeer. Spend, 
spend, spend.
It's our only hope.

But there is a limit to how much debt consumers can handle. 
Amid the clatter of news and facts, is a whisper of what is 
being called "consumer stress." Credit counselors report a 
30% increase in business this year over last. Bankruptcies 
are increasing, as noted above. Consumers seem to be 
'maxing out' their ability to borrow and spend. In April, 
for example, people spent $49.7 billion more than they 
earned. How long can this go on?

What the Fed can't do; it won't do. It can't erase 
inventories, or turn a bad business into a good one. Nor 
can it wave a wand and make consumers' debt balances 

What the Fed can do - lower the Fed funds rate...and 
increase 'liquidity' - it can be counted on to do. The 
funds rate can go to zero, and in real terms, below zero. 
Will a funds rate of zero prevent stocks from regressing to 
the mean? Will it light a fire under productivity and GDP 
growth? Who knows. But in Japan, it had no such effects.

And liquidity? It 'has to go somewhere' is the popular 
expression. But it might well go to rebuilding consumer 
savings accounts...or offsetting deflationary consequences 
of a stock market meltdown...or, yes dear reader, even to 
increasing the price of bread, houses and movie tickets. 

There were those - many and famous - who urged investors to 
buy tech stocks and dotcoms a year ago. But only half the 
population - the upper half by income - got to take 
advantage of this advice. Consumers with more modest 
incomes, or perhaps better sense, did not get a chance to 
lose money on the tech mania. But now, they have an 
opportunity to do something equally stupid: They can climb 
aboard the Fed's 'Debt Express,' Destination: Unknown.

Your editor, 

Bill Bonner

P.S. What the Fed cannot do might nevertheless happen. Alan 
Greenspan, if nothing else, is famously lucky. It was his 
great luck to step onto the #1 Engine at the Fed reserve 
switchyard after Paul Volcker had sharply raised interest 
rates thereby shut off the supply of oxygen to inflation. 
It was Volcker who took the heat and did the dirty work.

Greenspan has had a downhill run ever since.. coasting on 
the slope of declining interest rates, with no inflation 
threat on the horizon.
Maybe he'll get lucky again.

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: June 05, 2001

Published By Tulips and Bears LLC