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Contributed by Bill Bonner
Publisher of: The Fleet Street Letter

TUESDAY, 12 JUNE 2001 


Today:  The Baby Boomers' Gift To The 21st Century: Recession

*** McVeigh is dead. Justice is done. But Reno still on the 

*** Mr. Market feeling a little down...

*** Coal burns hot...a worldwide slump (except for the 
world's biggest countries)...Marseille anyone?

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*** "McVeigh no longer has the power to hurt, by word or 
deed," Oklahoma's governor reassured the nation. The 
International Herald Tribune reports that the McVeigh was 
fed two pints of chocolate chip ice cream. Then, just to 
make sure he was dead, they injected him with some even 
more lethal ingredient.

*** McVeigh, I don't have to remind you, was ice creamed in 
retribution for his role in killing innocent women and 
children. His big mistake was his target. If he had chosen 
better he could be a U.S. Senator or maybe head of the 
Justice Department. Best not to think about it.

*** But wait...our we've strayed off our beat... Let's see 
Eric, what's going on in the land of investments, economics, 
and filthy lucre?

Eric reports from Wall Street:

Tech stocks, once again, showed the way down as the 
Nasdaq lost another 2%, to 2,170. The Dow dropped 
55 points to 10,922.

Even an incorrigible optimist like Mr. Market can't 
see the glass as half-full every day. Occasionally, 
he notices the space between the rim and the liquid 
and gets an alcoholic working on his 
last drink after the liquor stores have closed. 

Yesterday, his attitude turned downright despondent 
after Merrill Lynch issued some negative comments about 
contract-manufacturer companies like Celestica and 

These manufacturers of various electronics for companies 
like Motorola and Cisco aren't making quite as many 
widgets as they used to. Yet, even though business 
conditions are worsening, many stocks in the group have 
rallied almost 70% from their early April lows. That 
adds up to a "Neutral" in Merrill Lynch's book. The 
rest of us might call it a "Sell."

Up north, Canada's once high-flying Nortel Networks 
fell to a fresh 52-week low, dragging the Canadian stock 
market down with it.

While technology stocks stumble and bumble along, 
resource-related stocks continue their winning ways. 
Most oil-related stocks ended the day in the plus column.
"The Dow Jones Coal Index is up an amazing 279% from one 
year ago," observes John Myers, editor of Outstanding 
Investments. John thinks the boom times are only 
beginning for the U.S. coal industry. "U.S. coal producers 
saw exports surge by a whopping 37% last year compared 
to 1999. An energy-hungry world seems to have a craving 
for U.S. coal - a trend that will boost profits at coal 
companies and put dollars into the pockets of smart 
resource investors." (see: Coal Market Heating Up )

In May, Taiwan's global trade plunged 26%. Orders for 
U.S. technology goods like computers and semi-conductors 
have collapsed 40% since last year, the ISI group reports.

"Taiwan's economy is on its sickbed," Credit Lyonais 
Securities Asia (CLSA) surmises, "and it doesn't seem to 
have a doctor either." CLSA notes that the current 
unemployment rate stands at a record high and first-quarter 
GDP growth was the lowest in Asia. "The final piece of 
evidence: low hotel occupancy rates and half empty bars 
even while Taiwan's mammoth Computex's trade show was in 

Things aren't any better in Japan, either. Japan's 
economic output fell 2% in the first quarter - despite 
more than 5 years of easy money policies. Funny isn't it... 
the way people have no confidence in Japan's central bankers 
and almost unlimited confidence in their American 

Yet, amid the global economic slowdown, the two most 
populous countries on earth are oases of economic growth. 
Economically speaking, China and India are doing quite 
nicely, thank you.

Friedburg's Commodity & Currency Comments observes, 
"China's economic strategy has made it, for the most part, 
impervious to the regional and global slide in economic 
activity...China should finish 2001 with another 8%-plus 
growth rate."

The Indian economy continues to sail (mostly unscathed) 
through the global economic tempest. While perhaps not as 
stalwart as China's economy, India's real GDP growth will 
likely exceed 6% this year.

The nation of one billion people now claims 3.7 million 
cell-phone subscribers - an 89% increase from the year 
before. Only 996.3 million to go.

Alan Greenspan is a "one trick pony" according to DR Blue 
team member David Tice In a recent interview with 
Welling@Weeden, Tice notes that whenever he's facing 
adversity, Greenspan's consistent tactic has been simply 
to create more credit and thereby entice consumers to spend 
beyond their means. "The point is," says Tice, "the consumer 
has to keep borrowing in order to keep the boom going."

Tice argues that the Fed's easy-credit tactics promote 
excessive borrowing in the corporate sector as well. "We've 
taken the debt-to-equity ratio on the S&P 500 from 84% to 
116% over the last 15 years." In the process, says Tice, 
"We misallocated capital. Instead of building power plants 
in California, we built more bandwidth than we need..." 

*** As you may have noticed, Eric does the heavy lifting 
for the Daily Reckoning. I do the kibitzing. Last night, I 
had dinner with a few French friends, one of whom travels 
frequently to America. "The big difference," he commented, 
"is that in America people do jobs they are not trained to 
do. So, you get terrible service, sometimes, from barely 
qualified people. But the advantage is that you have people 
who will try almost anything." 

*** "If a 'well-diversified' investor was burned in U.S. 
stocks recently, chances are it was primarily due to one or 
more of these ten culprits," writes C.A. Green, of the Oxford 
Club "Microsoft, Cisco, Intel, Dell, JDS Uniphase, Oracle, 
Ericsson, Nokia, Nortel Networks and AT&T. Together 
they make up three quarters of the drop in the S&P 500 over 
the past year." 

*** How to do better? Green: "Look at what sectors have 
been out of favor recently and are likely to ride the cycle 
all the way back to the top again. To my mind, that means 
favoring value stocks over growth stocks, small and mid-caps 
over large caps, and international markets over Nasdaq."

*** Maria's career in show biz seems to be taking 
off....slowly. She had her first paying modeling gig the 
past weekend. She'll be featured in a French teen magazine, 
I believe. And she may be offered a part in a real movie - 
to be filmed in October. If she gets the part, she'll have 
to be on location in Marseille for two months - with a 
tutor and a chaperone. Any DR reader want to spend two 
months with a beautiful 15-year-old in the South of France? 
No, on second thought, I'll do it myself. 

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Sha, la, la, la live for today...
Don't worry about tomorrow, hey, hey, hey...

An actual song lyric, 
Written by Grassroots
Theme song of the Baby Boomers?

"Savings seen as threat to the economy," warns a headline 
from the Chicago Tribune.

Can anything be done to stop this menace?

Of course, much is being done. Mr. Greenspan and his band 
of merry central bankers are doing all they can. The fed 
funds rate has been cut more aggressively than at any time 
in history. Likewise, the money supply is growing at the 
fastest rate since the late '70s. 

In short, our central bankers are mounting an effort to 
debauch the currency worthy of a gigolo in a finishing 

Dallas Fed governor, Robert McTeer, adds comic rhetoric: 
"Go out and buy an SUV," he urges consumers. Spending 
yourself deeper into debt is an act of 'patriotism', he 

Yet, virtue sometimes triumphs - even if by accident or 
lack of opportunity more often than by force of will. 

"Sated, Will Consumers Hurt the Economy," asks the Wall 
Street Journal. The Journal article worries not that 
consumers have lost their will, nor their ability...but 
they may have lost interest. Businesses invested too much 
in IT and other capital improvements in the late 90s. The 
business sector is now "teched up." Consumers went on a 
buying spree too - loading up on new cars, houses, and other 
big-ticket durables. Could consumers be 'durabled up' too, 
wonders the Journal. 

But the threat doesn't stop there. A bigger risk is that 
baby boomers will discover savings as they once discovered 
sex, drugs and rock & roll. They may even come to like the 
idea...and think they invented it. And perhaps they will 
even do it, like everything else they do, to excess.

The vanguard of the boomers are now 56 years old. Behind 
them trail 80 million Americans, few of whom have taken 
the challenge of retirement planning very seriously. As I 
reported in this space a few days ago, 80% of the 
population has no more than 8 months' worth of financial 

"50-Plus Population Not Prepared for Retirement" says an 
AARP Report. And the number of those not prepared for 
retirement is swelling faster than their lower extremities. 
In 2000, about 76 million Americans - or 28% - were older 
than 50. By 2020, there will be 40 million more in that group, 
amounting to 36% of the population.

Well, well, well...

You will recall, dear reader, that one of the sustaining 
rumors of the boom on Wall Street was that these millions 
of baby boomers were pouring billions of dollars into 401ks 
and other stock market investment programs in anticipation 
of retirement.

This gush of money was supposed to carry the Dow to 35,000 
in what Harry Dent called "the greatest boom in history." 

Yet, nearly half of the baby boomers never bought any stock 
and never will. And even those that do buy stocks may not 
continue to do so forever.

Why not? Because they are getting a lesson in how the stock 
market really works. Stocks tend to go up more often than 
they go down. But then, they compensate for this upward 
bias by dropping suddenly and sharply - or going nowhere 
for years.

Arguably, an investor who still wears his baseball cap 
backwards can wait out the down cycles. Over the very long 
run, he can say to himself, I'll come out ahead.

But an investor approaching retirement looks at his 
finances with a greater sense of alarm. He is often willing 
to forgo the incremental gains from stocks in favor of the 
surer returns from bonds...or mortgage lending...or rents. 

Could it be that Harry Dent, whom calls a "human 
crystal ball," has gotten the story completely backwards? 
Might not Dent's vision of the 'greatest boom in history' 
be shattered by the very boomers he expects to create it?

Wouldn't that be just like Mr. Market, dear reader? 

Dent predicts that stocks will fall in the near term - to 
about 7,000 on the Dow. But after this happens, stock 
prices are supposed to shoot back up wildly. 

Mr. Market will decide for himself what to do, of course. 
But I will give him a suggestion: 

Confirm the first part of Dent's forecast...but not the 

After the Dow has lost 35% of its value...and the Nasdaq 
60%...will baby boomers continue spending at the same rate 
and rush back into the stocks that have just burned them? 
Or, approaching retirement and stocked up on durables, will 
they do what consumers in similar circumstances have always 
done: cut back on spending...and place the savings 

Even a little bit of forbearance could have a dramatic 
effect. John H. Makin of the American Enterprise Institute 
calculates that when you include capital gains as savings, 
Americans 'saved' about 15% of their incomes during the 

People are not idiots, not even baby boomers. They know 
they need to set money aside for the future. So, when 
capital gains disappear, they have to compensate somehow. 
For a while, of course, they can tell themselves that the 
market will come back...and the capital gains will return. 
And, maybe the market cooperates - for a while. But, sooner 
or later, somehow or other, stock values have to work 
their way back to the mean. After a long period of superior 
gains, there must be a period of inferior ones. 

When the baby boomers recognize that they face a stretch of 
time without capital gains from stocks - or even losses - 
they will decide to increase savings in other ways. 

Makin figures that if they save at only one third the 
prevailing real rate for the 1990s - that is, at 5% - they 
would have to forego $350 billion of spending each year. 
This would subtract 3.5% from the GDP - effectively 
guaranteeing recession for many years to come.

Dr. Richebacher has done the math too. He found that if the 
savings rate were to revert to only 3% to 4% of disposable 
income - less than half the postwar average - it would make 
for "the deepest and longest recession since WWII."

Your reporter, just saying...

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: June 12, 2001

Published By Tulips and Bears LLC