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Contributed by Bill Bonner
Publisher of: The Fleet Street Letter



Today:  The Life of Alan

*** The bills are coming due...consumers in trouble

*** People not buying mobile phones, or cars, or airline 

*** Capitalists exploited! What's a normal rate of 
return? Jules passes...and more!

*** An AP article: "The bills are coming due for the 
shopping spree of the 1990s, and Americans are having 
trouble paying up. Personal debt is at an all-time high, 
and the amount of income Americans are dedicating to 
making payments on it is at levels unseen in 15 years. 
Mortgage delinquencies and write-offs by credit card 
companies are rising, and personal bankruptcy filings 
could hit a record this year..."

*** Among the things that consumers are beginning not to 
buy are mobile handsets and airline tickets. Northwest 
Airlines' CEO said yesterday that he had never seen 
ticket sales fall off so suddenly. And the chief of one 
telecom company estimates that sales of 400 million 
phones this year would be "extremely ambitious." Last 
year, 620 million units were expected to be sold this 

*** Canada's leading telecom, Nortel, fell another $4 
yesterday. Even at the peak of the telecom boom, 
however, Nortel never made a profit. It hasn't been 
profitable since '97.

*** And the Industry Standard, host to technology 
company advertising, says that ads are off 70% since the 
beginning of the year.

*** Sales are falling and so are many prices. Steve 
Leuthold tracks 75 commodities. Recently, most of them 
are falling in price. 

*** Greenspan is probably right. Inflation is not 
threatening the U.S. economy - not yet. Deflation is the 
threat. At least bond buyers seem to think so. The gap 
between the 10-year Treasury notes and inflation-indexed 
TIPS has fallen below 2%, suggesting either that bond 
buyers believe inflation will be below 2% for the next 
two years...or that they've lost their minds.

*** Support for the latter proposition is offered by a 
brief glance at a chart of inflation rates. Currently 
3.7%, inflation has only been 2% or lower on two brief 
occasions within the last 30 years - once in 1987, and 
once again in the late '90s. 

*** On the other hand, I notice that the big losers 
yesterday were the gold stocks - down about 5%, while 
the price of the metal itself fell $1. Gold seems to see 
no inflation menace either.

*** Meanwhile, Lynn Carpenter's writes to tell me she's 
got another hot one on the burner - up 50% currently. If 
you are interested in learning more about Lynn's service 
please click here.

Let's see what else happened yesterday, Eric?

- It was a warm, almost-summer day in Manhattan 
yesterday, and Wall Street finally enjoyed a day in the 
sun. The Nasdaq jumped 38 points, while the Dow tacked 
on 50.

- Nevertheless, the financial weather system featured 
more than a few storm clouds. Tellabs, Teradyne and 
Northwest Airlines each announced deteriorating 
profitability. Undaunted, very few investors ran for 
shelter yesterday. Rather, it was a day to ignore the 
gathering clouds and bask in the warm glow of hope.

- Consumer spending in New York is headed for trouble, 
according to Crain's. "The city's economy faces a big 
shock beginning in December and continuing into next 
year when Wall Street will issue bonuses. Bonus payments 
totaled about $13 billion this year and are one reason 
why the New York economy has held up so well compared 
with the rest of the country...Wall Street profits for 
this year are now likely to be only a third to a half of 
last year's, which would reduce bonuses by at least that 

- Yet, somehow, investors are keeping the faith in 
Greenspan's ability to steer our economy on a steady 
course - at least judging by the strongly performing 
cyclical stocks. The Morgan Stanley Cyclical Index (CYC) 
has advanced about 30% from its October lows, even 
though signs of a recovery loom far beyond the visible 

- Steve Leuthold, of the Leuthold Group, observes, "From 
1900 to date, the stock market has compounded at a 10.8% 
annual rate." However, says Leuthold, from 1995 through 
the 2000 peak, the S&P 500 compounded at the much higher 
rate of 25.7% per year. 

- Only one of these rates of return could be considered 
"normal" - a hint: it's not 25.7%. Citing the work of 
Anirvan Banerji, head of research at the Economic Cycle 
Research Institute, James Grant observes that U.S. 
industrial production, which has now fallen for eight 
months in a row, "has never [produced] a string of more 
than three monthly declines during the postwar era 
except in times of recession."

- Likewise, Grant observes that the U.S. unemployment 
rate has risen 0.6 percentage point from its lows of 
last fall. "Never in postwar annals has the jobless rate 
climbed by more than 0.4 percentage point, except in 

- A couple of weeks ago, 86,000 people from 143 
countries signed up to take the Chartered Financial 
Analyst (CFA) exam. Only 10,000 eager applicants showed 
up for the test in 1990. The rapidly swelling ranks of 
CFAs means one thing for sure: the lower the stock 
market falls, the less likely we will be to receive 
incorrect change at McDonald's.

- "Even as Tyco International CEO Dennis Kozlowski 
stacks floor after floor on the Tyco revenue edifice," 
write's Andy Kashdan, "the 
structure's financial underpinnings are rotting away. 
Tyco is a growth stock without the growth. Tangible book 
value (the stuff that you can put a real value on) has 
literally disappeared - falling from $701 million at the 
end of fiscal 2000 to a negative $4.4 billion as of the 
second quarter."

- "Just look at P/E ratios..." notes Dr. Richebacher. 
"Most of them are higher than a year ago as profits have 
fallen even faster than stock prices. This is 
overconfidence... Few people are ready to sweep the 
miracle stories of the past few years into the dustbin." 
(More below...) 

- Jay Akasie of "Krispy Kreme is a 
perfect example. Despite its listing on the Big Board 
earlier this year, KKD retains its Nasdaq-flavored 
valuation with a P/E of 118. Assume the doughnut king 
manages to post 25% annualized earnings growth... 
investors would actually lose an average of 7% per year. 
Even a five-year Treasury note would yield 4.8%. Given 
valuations like these, it's clear the market is a long 
way from any bargain-basement values." (see: Don't Shop 
Til P/Es Drop)

*** "Hey Dad," said Jules cheerfully, when I got home 
last night. "They passed me." The 13-year-old flies 
dangerously close to the ground, in my opinion, but he 
seems to end up where he wants to go. 

*** Later, I took the two girls and Elizabeth out to 
dinner. It was probably our last night out together in 
Paris - at least for a while. We are all returning to 
the U.S. for the summer. And then, Sophia, 18, will soon 
be going off to do other things in other places with 
other people. 

*** 'Children grow up so fast' say the Empty-Nesters. 
'Not fast enough,' say those whose nests are still full. 
But yesterday, on Midsummer's eve, thinking about Sophia 
leaving, I recalled Shakespeare's lines: 

...momentary as sound, swift as a shadow, short as any 
Brief as the lightning that in the collied night,
Unfolds both heaven and earth,
And ere a man has power to say: behold!
The jaws of darkness do devour it up.
So quick bright things come to confusion!

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Let us return to our epic novel.

Our hero, Alan Greenspan, was a bright young man facing 
a modest career as a saxophonist in a jazz band and even 
more modest prospects as a gold bug and member of Ayn 
Rand's small, gabby circle of 'objectivists' in New 

In 1963, he wrote:

"The financial policy of the welfare state requires that 
there be no way for the owners of wealth to protect 
themselves. This is the shabby secret of the welfare 
statists' tirades against gold... Gold stands in the way 
of this insidious process. It stands as the protector of 
property rights. If one grasps this, one has no 
difficulty in understanding the statists' antagonism 
toward the gold standard."

But neither power nor money are given in much abundance 
to such men. Neither clear-headed polemics nor saxophone 
riffs nor gold buggery pay very well. And so, our hero 
decided that rather than fight the statists, he would 
join them. 

After many years of exertion, Alan Greenspan became the 
one of the most powerful central planners since Joseph, 
the Jew who interpreted Pharoah's dream and then became 
overseer of all Egypt, second in command to Pharoah 

Now, Alan faces his biggest test. 

After 18 fat years, all of a sudden, the American 
economic Nile has begun to run dry. Our hero is on the 
spot. For unlike Joseph, Alan did not encourage savings 
during the bountiful years. He made a remark once about 
'irrational exuberance," but that was the end of it. He 
later recanted, saying that there was no need to worry, 
and no need to save - future harvests would always be 
rich and full.

Worse, he nurtured the myth - now widespread among the 
people - that he, Alan Greenspan, could control the 
great river himself. Through the hocus pocus of the 
central bankers' arts he was supposed to be able to 
restore the river to its former levels. Alan knew that 
this was not actually so, but he hoped that he could 
keep people believing it until the river recovered on 
its own.

And so, the drought has begun. And the granaries are 
empty. Already, those who were most exposed to the risk 
of drought conditions - the investors - have 
taken huge losses. But they were at the margins of the 
economy, not down in the rich, fertile bottomlands of 
the Dow. 

Investors are not alarmed. The river will flood again, 
they say, it is just a matter of time. "The worst is 
behind us," chant the corporate CEOs, the newscasters, 
the analysts, and the great steaming mass of investors. 
Still, the question is on everyone's lips - when?

People still think Greenspan can restore the mighty 
river by opening the floodgates of liquidity. Indeed, so 
furiously has the Fed chief been working the winches and 
levers he must have gotten blisters on his hands.

Rates have been lowered 5 times in as many months. Next 
week, he will probably cut rates again, perhaps by 25 
basis points, perhaps by 50.

And the money supply! "M3," reports Dr. Kurt 
Richebacher, "shot up by $321 billion in the first 4 
months of 2001... Broad money in the last few months has 
been expanding at an annual rate of 12% and higher." M3, 
too, has been rising at a double digit rate year over 

Surely, all this liquidity should find its way into the 
consumer economy, investors believe. Accordingly, they 
boosted share prices from April 2nd until about a week 

And yet, the irony we discovered yesterday is that 
Greenspan's liquidity may never reach the real economy. 
Greenspan, master of the money supply, protector of the 
dollar, overseer of the entire world economy...cannot 
control the price of consumer credit. Greenspan may be 
willing, but he is not able. The markets stand in his 
way. Mortgage interest rates are higher than they were 
at the end of last year. And credit card interest rates 
have hit minimum levels. 

"We notice a total failure of the Fed's rate cuts," 
writes Dr. Richebacher. The Financial Times elaborates: 
"The US economy continues to labour under an excess of 
unsold goods; an excess of production capacity; and an 
ongoing deterioration in corporate profits and profit 
forecasts. All have suggested the possibility of more 
cuts in production and staffing levels in the months 

Thus, Greenspan's easy money flows, not to consumers, 
but into the vaults of bankers - who now borrow at real 
rates near zero and lend at real rates as high as 11%. 

Mr. Greenspan, himself, responded to this perversion in 
his remarks yesterday. He urged bankers and other credit 
institutions to lend more freely in order to keep the 
economy moving.

Spend, spend, spend, urges Fed governor McTeer. Lend, 
lend, lend, urges Fed chief Greenspan.

But the object of their attentions, the consumer, upon 
whose back the New Economy has rested for so long, is 
about to collapse...

"Many experts convey the impression that consumer 
spending has remained strong," writes the Jeremiah of 
modern economists, Dr. Kurt Richebacher, but "the 
general perception of rather stable consumer spending is 
another illusion." 

Auto sales for the month of April, for example, were 
reported to have increased by 0.8%. But this was 
achieved by manipulating the numbers of previous months 
and making seasonal adjustments. In fact, Dr. 
Richebacher reports, sales actually fell...from 603,340 
autos in March to only 520,394 in April.

And, while consumer spending growth rates are still 
positive - around 2% - Dr. Richebacher explains, "the 
rate of growth of retail sales has literally collapsed 
over the year."

"The great hope is that a debt-addicted consumer will 
keep the economy out of recession," concludes Dr. 
Richebacher. "Don't bet on it. He has no chance. The 
longer he keeps borrowing and spending...the sharper his 
later pullback in spending will be. His finances are in 
rapid deterioration: losses in the stock market and 
sharply lower growth in real disposable 
income...interest payments have become a quickly rising 

The consumer is in trouble. The economy is in trouble. 
And Alan Greenspan, the most powerful central banker who 
ever lived, shudders in his bath.

Stay we discover how this story will turn out 
- tragedy, comedy, or farce?

Bill Bonner

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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

Published By Tulips and Bears LLC