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Contributed by Bill Bonner
Publisher of: The Fleet Street Letter



Today:  Faith and History, Fear and Greed

*** "Americans' Debt Soaring..." will it never come back 
to earth?

*** The worst may be, well, could be...hopefully, 
possibly...kinda near the very beginning of what might 
turn out to be...the end. 

*** 3 clues to what is really happening on Wall 
Street...insider trading...Pearl Harbor (and other 

*** "Americans' Debt Soaring" declares a headline in the 
Chicago Sun Times. "More and more people are at the 
crisis point," the paper quotes a debt counselor. The 

* The second-highest number of personal bankruptcies on 
record - 356,836 - were filed during the first three 
months of this year, according to the American 
Bankruptcy Institute. 

* The average amount of debt per household has reached 
14.29 percent of disposable income, the second-highest 
rate ever, according to the Federal Reserve. 

* The average credit card debt per household hit $8,123 
in 2000, nearly three times the average amount owed 10 
years ago, according to, which tracks the 
credit card industry. We owe $568 billion to credit card 
companies, up from $172 billion in 1990.

* The percentage of credit card loans considered 
delinquent - as well as the number of Americans behind 
on mortgage payments - at the end of last year hit their 
highest levels since 1992, according to the Federal 
Reserve and the Mortgage Bankers Association. 

*** As you will recall, the health of the economy 
requires Americans to spend themselves even further into 
debt. Americans may be immune to prudence, but they are 
surely vulnerable to incapacity. Either might bring on 
an attack of thrift, of which, even a mild case could be 

*** But let's see what went down on Wall Street 
yesterday. Over to you, Eric:

- Thanks to a not-terrible earnings report by Oracle, 
the Nasdaq jumped to a 3% gain shortly after the opening 
bell. "We think, we hope that the worst is over," Oracle 
announced, "Hopefully, we hit bottom in our fourth 

- But one hedge fund manager with whom I spoke called 
the Oracle announcement, "A big 'So What?' Nothing has 
changed...Oracle's operating earnings fell a 
considerable amount. I'm not prepared to call that 'the 
bottom,' no matter what Larry Ellison says."

- The early gains didn't last, anyway. On the day, the 
Nasdaq snapped its string of seven consecutive losing 
sessions by gaining only four meager points...but I saw 
no spontaneous celebrations on Broad Street. The Dow 
fell 49 points.

- How tough are things becoming in this ol' economy of 
ours? Agilent CEO Ned Barnholdt provides a clue: 
"Frankly, the speed and severity of the slowdown [is] 
unlike anything I've seen in my 34 years in business."

- Fred Hickey provides a second clue: "Even the $1 
billion on-line adult site industry is struggling... One 
site owner despaired, 'Lots of people are canceling 
memberships saying they've lost the job or are stacked 
up with credit card debt.'"

- Clue #3: A friend of mine who is vice president of a 
commercial real estate firm in Manhattan reports that 
the real estate market is noticeably slowing down...on 
Martha's Vineyard. A perennial renter on the island, he 
relates that an astonishing number of houses remain 
available for rent even though the season is almost 
underway. "Rental agents are returning my phone calls on 
the very same day," he reports with amazement. "That's 
never happened before."

- One imagines that commercial real estate agents in 
Manhattan are promptly returning phone calls as well. 
"Manhattan office leasing dropped dramatically in the 
first four months of this year," Crain's reports, "with 
the volume of space rented in midtown and downtown just 
half of what it was in early 2000. And nearly 6 million 
square feet more space was vacated than was rented..."

- Exacerbating the trend, companies like Cisco Systems 
are dramatically scaling back plans for office space in 
New York. Instead of the half-million square feet of 
office space on Times Square that Cisco had planned to 
lease, the struggling tech giant has decided to lease no 
more than 100,000 to 200,000 square feet. 

- Many public company insiders have been stepping up 
their selling lately, according to Thompson First Call's 
insider-selling guru, Paul Elliott. Sales of so-called 
restricted stock totaled a hefty $11.2 billion in May up 
from $6.9 billion in April.

- Charles Biderman, editor of Liquidity Trim Tabs, tells 
me that the insiders at many former tech highfliers are 
leading the charge to unload shares. Biderman also notes 
a remarkable surge of initial public offerings (IPOs). 
He reports, "The five days ended Wednesday June 13, had 
$15.5 billion in new offerings - which was a 5-day 
record. The $57 billion sold in the last seven weeks is 
also a record."

- I don't know what all these selling insiders see, but 
I suspect it is not a "second-half recovery".

*** What else? Well, I took my mother to see "Pearl 
Harbor" last night. I thought she might enjoy reliving 
an event in which her husband, and my father, played a 
small role. What a disaster! I mean, the movie. It lasts 
longer than the attack itself and is so revoltingly 
shallow and silly, it makes the viewer embarrassed. Only 
the Japanese seem to know what they are doing - and go 
about their business with dignity and skill.

*** In one scene, President Roosevelt struggles to his 
feet - which is not easy for a cripple to do. It is hard 
not to laugh as the old humbug tries to shame his 
military commanders with his show of determination and 
the battle courage of a man confined to a wheel chair 
10,000 miles from the front lines.

*** I was curious about the French reaction. The French 
fleet was the object of a surprise attack, too. On July 
3, 1940, British warships pulled up in front of the 
harbor where the French were moored at Mers el Kabir and 
proceeded to blast them to pieces. More than 1,200 
French sailors died. No pretentious films have been made 
to record the incident.

*** The children are in the home stretch. Just ten more 
days of school. Sophia is studying hard for her final 
exams...and will then take a year off before college. 
Maria needs to pass a single test - the brevet. Without 
it, her scholastic possibilities are limited, in France 
anyway. But Maria has already turned her attention away 
from school. She figures she will be able to make a 
career for herself in show biz, no matter what happens 
on the brevet. Jules seems to be squeaking by this year 
- or at least he thinks so. We won't know until next 
week. And Henry and Edward are doing okay and ready to 
move ahead to the next level. Henry, 10, enters the 
'college,' the French equivalent of junior high, next 

*** You have no reason to care about my children, of 
course, but what the heck...the Daily Reckoning is free 
so I feel I have the right to bore you with the details 
of my family life...

Until tomorrow...

Bill Bonner

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by John Mauldin

"Faith," wrote Paul, "is the substance of things hoped 
for, the evidence of things not seen."

The received wisdom of Wall Street is that the stock 
market is driven by the twin emotions of Fear and Greed. 
And for hundreds of years, that wisdom has been true. 
But there is now a new emotion asserting its right to 
move markets: Faith. 

Specifically, it is a Faith in the power of the Federal 
Reserve to either forestall recessions or that any 
recession will be such a short-lived event that stocks 
must shortly and surely take off thereafter. In an 
ominous sense, it is really Faith in just one man to so 
manage the economy of the world that we avoid the twin 
shoals of inflation and recession.

This trust supplies the substance of a quick recovery, 
and the evidence of large and growing future profits. As 
a basis for their Faith, members of the Church of the 
Fed point out that one year after the Fed begins to cut 
rates, historically the stock market was up an average 
20%. During market dips, they repeatedly chant that 
mantra as they buy even more Cisco and Oracle. 

While these faithful cite this one shaky premise (see 
below), History itself dredges up a Pandora's box full 
of contradictions. Thus we become witnesses of a titanic 
boxing match between Faith and History.

A brief perusal of economic history yields this crop of 

* Never have we had a negative yield curve as appeared 
last August and not had a recession four quarters later. 
The yield curve tells us a recession should begin in the 
third quarter of 2001.

* Industrial production has never dropped as it has for 
seven straight months without having a recession.

* We have never seen such large losses in non-farm 
payrolls without a recession in the last four decades. 
Increases in unemployment usually PRECEDE recession buy 
7 months. This means a recession should begin in the 
third quarter. Further, many recessions started from 
employment rates better than we currently have, so the 
fact that we only currently see 4.5% unemployment gives 
us no encouragement, at least from a historical 

* Manufacturing and trade sales have dropped 1.6% since 
last August. Such a decline has never occurred outside a 

* Many, if not most, of the one-year recoveries the 
Greenspan acolytes seek confidence in began at 
reasonable or low P/E ratios. History tells us it has 
taken index investors 10 years to eke out a profit when 
P/E ratios are at the current level. 

* Seriously slowing world trade, the debt markets, trade 
deficits, decreasing profits, more lay-offs, etc. Many 
of these are also in statistical territories that 
historically suggest we are facing a real honest-to-Alan 
recession in our near future.

So what is the problem? History tells us that the stock 
market declines over 40% in an average recession.

The bursting of the NASDAQ was not brought on by a 
recession. That was a greed-based, irrational bubble. We 
have yet to see how serious a decline, if any, will be 
precipitated by a recession which History tells us is 
right around the corner.

If we are going to avoid a recession beginning in the 
third quarter, SOMETHING needs to start showing some 
signs of a recovery. But as I survey the statistics, I 
ask myself where? What reason do I have to think that 
unemployment won't increase? That would seriously erode 
consumer confidence. Then, how long can consumer 
spending hold up? When is production going to start back 
up? What country is going to rally and pull the world 
back from the brink? Japan is in a deflationary spiral 
and Europe is starting to show real signs of weakness. 
Everywhere I look, there are far more negatives and 
questions than positive aspects and answers.

The Fed (Alan Greenspan) is in a death match fight with 
History. History tells us we should see a recession, 
lower stock market prices and higher bond market prices. 

And yet, the S&P and the Dow do not go down, and even 
the NASDAQ rises 30% in the face of what many think is a 
coming recession. Those of us who look to History are 
amazed at the Faith of investors in Greenspan.

In a way, Greenspan is not so much fighting History as 
he is trying to change future History. If he pulls this 
off, he will become History. By that, I mean that in the 
future, we will look at the possibility of recessions 
from a new vantage point. Analysts such as myself will 
not be able to point to History and say (as above) when 
these 10 things happen, we have always had a recession. 
We will always have to acknowledge that the Fed can 
"manage" economic History.

Those who have put their Faith in the Fed are basically 
saying that one man, or at the most, 5-6 men, can 
effectively direct the entire course of human economic 
commerce, and that they can do it with very limited 

History tells us that the stock market declines over 40% 
in an average recession. If the S%P 500 declines to its 
historical average value, it would drop below 800. 
Typically, one would expect the pendulum to bring us 
down to 600 or lower.

On the other hand, for the S&P 500 to go up 10% by the 
end of the year, you would have to believe that P/E 
ratios will remain in the absurdly high 25-28 range, and 
that 2002 earnings estimates will be 20% higher than 
actual 2001 earnings.

That takes a lot more Faith than I have. Investors are 
risking a 40% downside for a 5-10% upside this year.

The Fed has been giving History a real beating in the 
first few rounds. But like Ali fighting Foreman with his 
rope-a-dope tactics, History has staying power. Bet on 
History in the late rounds by a knock-out.


John Mauldin

(John Mauldin is president of Millennium Wave 
Investments and a frequent contributor to the Fleet 
Street Letter. Daily Reckoning readers can get his 
weekly e-letter for free by going to:

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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: June 21, 2001

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